Ignore Korea And Ireland, It's The Technicals Driving These Market Gyrations

Financial pundits are explaining the market’s recent gyrations as reactions to daily news and economic reports. Tuesday’s big decline was supposedly due to uncertainties created by the Irish debt crisis, North Korea’s shelling of a South Korean island, and the 2.2% decline in existing home sales, while the market ignored the positive upward revision of third quarter GDP.

Wednesday’s big rally was then supposedly due to the decline in unemployment claims, and that incomes rose 0.5% last month, slightly better than the 0.4% economists expected. In responding positively to those relatively minor reports, the market rally supposedly ignored the big plunge in Durable Goods Orders in October (the largest monthly decline since January, 2009), that new home sales fell 8.1% in October, worse than forecasts, while home prices declined further, and the inventory of unsold homes rose more than expected.

It’s much more likely that the market’s gyrations are technical in nature, caused by traders watching and reacting to the market’s struggle with short-term support and resistance levels.

After initially spiking up in reaction to the Fed’s QE2 decision, the market topped out at least temporarily two weeks ago. The Dow subsequently broke below the previous support at its 21-day moving average for the first time since the big rally began in early September. That no doubt got the attention of traders.

The Dow then rallied back up to its 21-day m.a. last week, where the question was whether it would break back above the m.a., and re-establish the m.a. as support for a resumption of the rally, or would find the m.a. to now be overhead resistance with the correction likely to continue.

The question remains unanswered. In Tuesday’s triple-digit decline the Dow clearly found the m.a. to be overhead resistance.

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However, the Dow’s plunge Tuesday halted at the potential support at 11,000, as did its triple-digit decline a few days ago. So a lower high was created by the resistance at the moving average, but not a lower low on the pullback. 

And on Wednesday it rallied off that potential support back up almost to its 21-day m.a. again. So the jury is still out on the market’s short-term prospects.

Meanwhile, global markets are just as interesting. I don’t have space to show individual markets, some of which are looking positive, some negative. But the next chart shows that global markets as a whole topped out with the U.S. market a couple of weeks ago (leaving a potential double-top in place). And after finding their 21-day moving averages to be overhead resistance, declined to a lower low last night and yesterday. That has the chart in a potential negative pattern of lower highs on rally attempts, and lower lows on the pullbacks from those rallies.

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Of course it’s the longer-term outlook that is of more importance. But the current short-term situation is certainly interesting, and perhaps important to that longer-term outlook.

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