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Friday, June 21, 2013

Trading Noise Or Start of A Bigger Trend In Stocks

Many are searching to explain why stocks have taken a hit lately.  Pick the reason (1) an if-based end to QE (if the economy doesn't weaken, if confidence doesn't falter unexpectedly, etc), (2) a new Fed chairman in 2014, (3) an unexpected jump in jobless claims.  Personally, I prefer they're down because people are selling after the recent breakout reached the upper 45 degree channel resistance (chart 1).  Nothing generates supply faster than a hint of weakness after big gains and quadruple-witch expiration.  A rare combination of the two usually means lots of activity for margin clerks.

The recent weakness in equities must be considered trading noise within the context of up trend that established new all-time highs in early June.  Support lies at 140 and 135.

While a big (panic-style) decline is coming, it will likely be lead by intermarket trend changes as dominant cycles turn negative (chart 2).  For instance, a break of the average weekly jobless claims downtrend, likely timed within the red box, will warning investors to change tactics ahead of the bear market.  Until then, the path of least resistance, likely contrary to popular sentiment after the big declines, is still up.

The bear market comes when the lower 45 degree channel is broken to the downside.

Chart 1:  Dow Industrials ETF Point and Figure


Chart 2:  SP 500 (SP500AVG), Average Weekly Initial Jobless Claims (AWIC) and AWIC Cycle Z Scores (AWICC1and2)


Headline: Weekly jobless claims jump 18,000 to 354,000

WASHINGTON (MarketWatch) - The number of people who applied for unemployment benefits last week jumped by 18,000 to 354,000, putting initial claims back near the recent average and indicating little change in a modestly improving labor market. Economists polled by MarketWatch had expected claims - a proxy for layoffs - to increase to a seasonally adjusted 340,000 in the week ended June 15. The average of new claims over the past month, a more reliable gauge than the volatile weekly number, rose by 2,500 to 348,250, the U.S. Labor Department said Thursday.

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