Short version: The overall trend is up. Take your eyes off the TV and look at price. It’s up. Buy low and sell higher and stick to your plan.
Technical traders differ from fundamental traders in their ideas about cause and effect. Fundamental traders tend to believe that the market moves mainly in response to news. Technical analysts say the price already reflects the market’s collective decision about what it will do in response to news, and that no news short of a major global catastrophe (think war or disease pandemic) will turn a market away from its prevailing trend.
To put it simply, the trend was up before Google and Microsoft missed earnings estimates and Bernanke testified before Congress saying nothing unexpected or clear. It was up before Bank of America and JP Morgan Chase reported unexpectedly high earnings and Tesla shares “fell sharply” (source: practically everyone) and then “rebounded” (source: same) as “US Car Sale Outlooks Arise.” (Investor’s Business Daily)
Outlooks arise? Forget the anguished English for a moment and ask, what does that mean? Does it mean any more than “investors sold Tesla, then thought, ‘Hey, Tesla’s a car, and cars are doing OK”? Not really. But the key words to look at in mainstream financial news are words like “as,” “on,” and “after.” As in:
Shares of X tumbled on missed earning report.
X’s price rebounds as sector prices rise overall.
X stocks rally after passage of such-and-such bill.
Note the word that rarely appears: “because.” The S&P rose overnight and the September futures contract stands at 1679.50 at 5:45 CST. Why? Is it “as investors react favorably to Bernanke testimony, optimism about low interest rates”? Or is it “because the trend is up. It’s just up. Never mind why”? Is cause and effect really at work in individual market rallies and selloffs? While algorithms are increasingly using Twitter trends and keywords to buy and sell, most algos are still technical. They had their sell and buy stops calculated before all this news that is apparently happening “as” the market dips and then rises to new highs.
It might be as unrelated to cause and effect as “Stocks rise as Bernanke trims beard for summer,” or “Tech stocks rally as First Lady harvests vegetable garden.”
That said, our call for Friday is to buy any early weakness, which we’re likely to see from profit-taking the same way Asian stocks are now digesting their rises this week. Later in the day, whether out of collective relief that the flood of news was generally not awful (and Tesla is a car), or just out of a desire to continue the nice, profitable uptrend and shoot for 1700 in the S&P, we’re thinking stocks will rally.
We can never be sure what the MIM will say until it says it, but we expect our proprietary Imbalance Meter to show a strong bias to the buy side leading into the close. It might be good for a scalp or two with the uptrend, but don’t be part of the herd. Plan your entries and your exits and don’t change your mind about your stops. Let someone else take the hit.
It’s 8 a.m. and the ESU is unchanged at 1680.50; crude is up 30 cents at 108.11; and the euro is up 20 pips at 1.3125.
In Asia, 7 out of 11 markets closed lower (Shanghai Comp -1.52%, Hang Seng +0.08%, Nikkei -1.48%).
In Europe, 8 out of 12 markets are trading down (DAX -0.07%, FTSE -0.21%).
Today’s headline: “S&P 500 Set for Fourth Week of Gains”