Current Thinking

by Mike Endres, Market Trend Trader | January 26, 2010

This past week has seen some changes in momentum, direction and feeling in the markets. Watching the short and medium term trends slip into opposition with one another is almost always a sign of a trading opportunity if short term trends change direction versus the medium term trend. If both short and medium term trends happen to get into sync, then a longer term trade is signaled - either long or short, it makes no difference as long as you trade with the trend. Most of the time with the MRO as a guide I am fully invested with speculative funds either long or short, simply shifting from one to the other as the trend changes.

So today, we'll throw a deluge of charts at you to illustrate how things are changing, at least in the short to intermediate time scales.

First, we look at the fortunes of the $US dollar. Unlike a lot of $Bears, I take at least an intermediate term $Bull position and the charts below show why.

First, the daily chart of UUP (our dollar proxy ETF) has just given a buy signal and within the next week, we'll know if it's serious. I suspect that any strength of the dollar merely reflects that the buck is the best of nothing but bad choices as far as currencies are concerned. But that situation can go for a long time and there's no since butting heads with the trend.

As you can see from the Weekly UUP chart, the initial shift from down to up occurred back in December of 2009 and still has made no powerful intermediate move - yet. None the less, both Weekly and Daily UUP charts are "in gear" to the upside. Please note that while the MRO rolled over and started down way back in June of 2009, no valid buy signal was generated until the first week of December and that was a puny one. As the MRO is still dropping below zero, the buy remains valid, if not signaling a lot of enthusiasm.

Since both the $$ charts are, at this time, none to strong as far as signals are concerned, only very modest speculation in a more powerful dollar along with close stops are recommended.

As you would imagine the US dollar Index DXY to be leading the way - and it is.

The weekly chart also shows strength - albeit none to strong. So it boils down to don't fight the trend and, at least for the moment, don't be super-bearish on the $$$. At worst the dollar is mildly bullish.

Now for the general markets, I use VTI as a proxy for the entire stock market. I find it quite reliable over time to determine overall market trends and sentiment.

The daily chart of VTI (as you would expect after the carnage of last week is factored in) has fallen out of bed. It broke through the uptrend going back to November of last year and the MRO is doing a power climb up through zero. Bearish near term for the stock market.

The Weekly chart of the VTI, while not rappelling down a cliff face, has gently slid below the long term uptrend, the MRO is turning up and the %R is rolling over. All that sets up a valid sell signal for the market in general and I expect it to get worse before it gets better. In fact, since both short and intermediate term trends are in sync on the downside, it may very be that we are seeing the start of either a correction (which I doubt) or a renewal of the big bad Bear (which I have been waiting on for months). Time will tell and it won't take long to see.

Now let's look at our old buddy Gold..

GDX, our goldbug proxy, is correcting from the highs reached last December. A downtrend has been established as GDX fell right through $45.50 or so like the parachute hadn't even try to open. Next stop is $42, otherwise ??. I am looking at this like one who is starving watching the host cook a large t-bone to medium rare. The lower it goes, the better I like it as it will, hopefully, provide another buying opportunity down the line and trash some over optimistic speculation along the way.

The GDX weekly has nothing good to say to the Bulls either.

While not as nasty looking as the Daily GDX, the weekly plotted uptrend has also been broken and a valid sell signal has been given. As long as the MRO is climbing - especially after passing through zero (see explanation below) - things will be very weak and the trend will be down.

It is a real problem with me (after having spent 3 full years developing the MRO) that I can't seem to come up with one other indicator I need; an indicator to tell me how long a trend will stay in place before it reverses! If it existed, it would carry the initials MFO and I'll let you figure out what to call it!

So, right now and until it changes, I will be out of the market except for those stocks that benefit from a stronger dollar. Since all stocks will sink with a general market failure, very close stops will be attached to anything I put into my trader's portfolio. Gold and the PM's will be set aside until we see how far they correct (I would dearly love to see $900 again but I only see that clearly when I'm under the influence of something!) and when they do turn around, it will be a great buying opportunity.

Have a great week and be careful out there. There are noises coming from the underbrush that sound bearish to me and with the exception of the $$ and perhaps some longer term federal paper, I intend to stand aside for the moment…

Notes on the MRO: The MRO is a mathematical formula the generates both buy and sell signals for any tradable security, commodity or future returning a high, low and close at the end of the trading day. A rising MRO signals weakness. I falling MRO indicates strength. The reversal of the MRO along with the reversal of the simple 5 DMA of the tradable item and the %R (lower part of the the chart) signals a change in direction of whatever is being plotted. Generally when the MRO becomes locked below or passes through zero into negative territory, a bullish move is in progress. When the MRO is going up or locked in above zero, a bearish situation exists.

Contact Information

Mike Endres | Market Trend Trader | Tavares, Florida | Email