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Dow Theory Major Stock Market Confirmation

Stock-Markets / Stock Markets 2010 Mar 19, 2010 - 05:33 AM GMT

By: Steve_Betts


Best Financial Markets Analysis ArticleJobless claims came in a little higher than expected while the change in the CPI was zero. Of course the financial news networks’ immediately went to work telling the world how this is not deflationary. At best it’s a thin argument and the statistics do not back it up. Yesterday the PPI came out at a negative 0.6% adding a little fuel to my deflationary argument. Also, the slowdown is not confined to the United States as the following text from a Bloomberg article points out:

Demand to haul cargoes has plunged because of the global recession, sending charter rates lower and spurring carriers to take vessels out of service. BW Gas Ltd., the world’s biggest shipper of liquefied petroleum gas, said last week it idled four tankers because rates plunged so low that each vessel was losing the company about $25,000 a day.

“There’s been an unparalleled collapse in demand,” said Harris, who was previously chairman of Clarkson Plc, the world’s largest shipbroker.

Yet we see that the Baltic Dry Index and the Transports have been on the rise for several months. This is one of the many contradictions we see in the market place and is related to the tremendous infusion of liquidity into the financial system. Distortions!

General comments aside, I want to discuss two things today: the major Dow Theory confirmation we experienced yesterday and gold. Yesterday the Dow closed higher by 47 points to end the session at 10,733 and that is eight points above the old closing high of 10,725 and a major Dow Theory confirmation. The Transports began to record a series of new closing highs early last week and the Dow failed to confirm the first five such closing highs, until yesterday that is. Today both indexes are again in positive territory and trying to close higher for the eight straight days. As you can see if the chart of the Transports below, it actually seems to be leading the  Dow higher and they both share one trait in common right now; RSI and MACD are both extremely overbought and it appears that the histogram has started to decline, indicating a top may be approaching.

I suppose I could make all sorts of comments about the absurdity of the Dow heading higher from here, blame intervention, and so on but the fact is that it will move higher although a modest correction may be close at hand. Once a reaction runs its course, then the question becomes how high is high. I look for the Dow to make a run up to strong resistance at 11,245 although we do have good resistance at the 10,817 level.

If the Dow could push past the 11,245 mark then there is absolutely nothing to stop it until it reaches 12,399. Given the fact that the Fed will not withdraw liquidity anytime soon, and the fact that big money has been on the sidelines for several months, I would not be surprised to see the Dow run as high as 12,339. That indicates to me that the Fed will continue to grease the wheels and that means that they are winning the battle against deflation, at least for the moment.

                                          SUPPORT                 RESISTANCE

DOW                                    10,633                            10,817
                                             10,334                            11,245
                                               9,706                            12,399

TRANSPORTS                     4,236                              4,685
                                               4,195                              4,844
                                               3,835                              5,111

Now let’s talk about gold as it will be one of the major beneficiaries of the rally in stocks. All the central banks will continue to print currency, probably at an increasing rate, and smart money will continue to view gold as the safe haven. Yesterday gold saw another test of the strong resistance at 1,136.70 and then sold off sharply to 1,118.00, only to come back to close at 1,125.00. Today the spot price is trading up 2.70 at 1,127.70 after overcoming some early selling and looks like it wants to go higher.

                                          SUPPORT                 RESISTANCE

SPOT GOLD                       1,090.10                         1,148.70
                                             1,077.60                         1,158.20
                                             1,048.90                         1,219.20

I have little doubt now that gold will first move through 1,137.60, then through 1,148.70, and then explode too much higher levels. Right now gold is range bound as you can see on the preceding chart, but the tertiary trend is still headed higher. The key will be a higher high above the upper band of resistance at 1,148.90 and then it is off to the races. Over the coming weeks I am looking for gold to test the 1,219.20 resistance and then move substantially higher. A lot of gold bugs have been chased out of the market expecting lower prices, and will be forced to pay up for the privilege of getting back into the market. Even though gold has moved above 1,000.00 the general public is still ignorant about the gold market. Once they pile in it will be impossible to stop this train.

By Steve Betts

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