ANALYTICAL TOOLBOX: Short-Term Outlook

Current Concerns

Word has it that the stock market is anticipating a follow-up to last week’s Fed cut of the discount rate with a cut in the federal funds rate. This is expected either prior to, or at the next meeting on September 18^th. The discount rate cut prompted borrowing by major banks that should help ease short-term borrowing difficulties. Although a federal funds rate cut is expected, when and whether it will happen, and if it’s a good thing or not, are both arguable.

As mentioned last week, the end of August marks the fiscal end of quarter for some funds. Those impacted will have to report on valuations that may be worse than Wall Street expected. Regardless of the actual results, it’s how far away they are from expectations that will likely impact market conditions going into September. It could prompt a strong rally or decline.

You may want to consider some reasonably priced straddles on days the markets are relatively slow and implied volatility low, if that’s within your risk tolerance. Since the next Fed meeting is Sep 18^th, there should continue to be price swings for the next few weeks as bad news is followed by good news followed by … or feel free to start the cycle with the good news. If no rate cut occurs before the meeting, consider checking market expectations closer to the date by searching news on “federal funds futures.”

Wall Street is also monitoring the hurricane season and its impact on oil, if any. While this seems to be affecting the stock market a bit, volatility on days that news is released about oil appears mild in comparison to news days with sub-prime lending, quant trading and Fed comments.

Current Charts

The indexes/securities used to view the short-term outlook include: 

INDU (the Dow Jones Industrial Average),SPY (the S&P 500 Index SPYDR ETF),QQQQ (the Nasdaq-100 Index ETF) andNYA (the NYSE Composite Index).

Without viewing weekly or monthly charts (), here are some comments on the daily charts:

INDU is in a short-term uptrend and remains above the upper line of its linear regression channel. It used the 200-day exponential moving average [EMA], currently at 12,885, as support last Thu. The next short-term test for the index may be at 13,380, the approximate level for the 50-day EMA. Fast MACD [settings: 6, 13, 4] and Stochastics [settings: 12, 5, 5] are bullish and the stochastic indicator is approaching a potential bearish resistance zone at 65.

Figure 1: Daily Chart of INDU with EMA, MACD and Stochastics

SPY moved back up above the middle linear regression channel late last week and is trending upward in the short-term. It closed above the 200-day EMA on 8/21 and is currently at approximately 145.10. It is approaching the 50-day EMA at approximately 148.30. Watch these unbiased areas to serve as support and resistance for the current trend. Fast MACD and Stochastics are bullish and the stochastic indicator is approaching a potential bearish resistance zone at 65.

Figure 2: Daily Chart of SPY with EMA, MACD and Stochastics

QQQQ is in a short-term uptrend and used both the upper line of its linear regression channel and its 200-day EMA as support last Thu.  The 200-day EMA is at approximately 45.60. It is approaching the 50-day EMA at approximately 47.75. Watch these unbiased areas to serve as support and resistance for the current trend. Fast MACD and Stochastics are bullish and the stochastic indicator is approaching a potential bearish resistance zone at 65.

Figure 3: Daily Chart of QQQQ with EMA, MACD and Stochastics

NYA is in a short-term uptrend and moved above its middle linear regression line yesterday. This delayed move does not reflect weakness in the index, but rather a longer regression channel period using 4 years and a 2007 end date. The other channels were drawn using 3 years of trend data, ending in 2006.

This index did however have a delayed move above its 200-day EMA, which just occurred Wednesday. The 200-dy EMA at approximately 9410 and the middle linear regression channel at approximately 9454 serve as near term areas of support that should be monitored. The 50-day EMA may serve as the next unbiased area of resistance, currently at around 9665. Fast MACD and Stochastics [not on chart] are bullish and the stochastic indicator is approaching a potential bearish resistance zone at 65. A fast DMI indicator [setting: 9] is also bullish with +DI moving upward and –DI moving downward.

Figure 4: Daily Chart of NYSE Composite Index with EMA, MACD and +DI/-DI

The Arm’s Index () is displaying positive breadth consistent with the Wednesday’s upward move in the NYSE Composite Index. On Wed it closed at a neutral reading of 0.79, so there is no bias for the Thursday’s opening level.

Summary

It’s too tempting to resist a forecast here … in the near term, the markets are expected to remain volatile.

To access other articles written by Clare White, please click here. 

Clare White, CMT 
Contributing Writer and Options Strategist 
Optionetics.com ~ Your Options Education Site 
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