Helping Self-Directed Investors Succeed Blog - Will These Key Reversals Work?

Will These Key Reversals Work?

October 13th, 2013

The uncertainty in markets today is palpable. Investors are at the mercy of political decision makers yet again. At the time of this writing no clear solution has emerged to the clearance of debt hurdle facing the US Govt.

Markets dropped sharply during the early part of last week when investors sensed there will not be any deal in sight for raising the debt ceiling. Just then, as it happened the previous occasion, Washington politics took a turn. With Republicans and Democrats coming together again with a proposal that was appearing acceptable to White House, investors came back in seemingly strongly. The DJIA gained over 300 points in one day. Markets built on Thursday's strong rally with another strong showing on Friday.

Technically, as it stands now, the long term moving average on these major indexes is trending strongly on an incline. At the same time prices on the S&P 500 and NASDAQ are also somewhat extended from their 40-week SMA prices. The DJIA tested the 40-week SMA this week and bounced sharply higher as the rally on Thursday materialized.

On the Weekly Charts, both S&P 500 and DJIA have logged positive key reversals this past week. Interestingly, NASDAQ could not accomplish that.

The question is, will these key reversals signal further moves higher?

Typically, in our view, a positive key reversal accompanied by a strong BIR Rating over 35 indicates strength in price action. On that basis, last week's reversals have not indicated strong technical conviction - despite the powerful bounce on Thursday and Friday. The DIA has logged a BIR Rating of +13 and the SPY managed to log only +5. The NASDAQ turned in -7, surprisingly.

From this perspective, we are not convinced about bulls pushing the markets higher. More surprises could be in store. From a cyclical perspective as well, October has been a tough month for stocks in general. So far, that toughness has not played out. The month is far from over.

The coming week is crucial and the quality of price action on major indexes can provide valuable clues on near term price action for the rest of the last quarter of 2013.

Good Luck and Happy Trading!

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