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Trading Lessons

Stock Market Dow Theory Shines Through

Stock-Markets / Stock Markets 2013 Mar 01, 2013 - 01:18 PM GMT

By: Christopher_Quigley

Stock-Markets

What a market. Even the most experienced traders that I know are having a difficult time getting a handle on what is happening. Wednesday’s market action caught a lot of folk napping.
Monday’s 216 point drop in the Dow Industrials convinced many that finally the much anticipated market “correction” had arrived.

The slight “uptick” on Tuesday was a classic VIX buy signal but it turned out to be a trap. Those traders who shorted the market on the 26th were pulverized by the bullish 175 Dow point move on the 27th.


What can we make of such whiplash moves?

For me, regardless of the economy, the movement of the market is understandable when you assess it through the paradigm of Dow Theory. The market is powering forward because technically it is very strong. This strength was first indicated by the 128 point breakout in the Dow Transports on the second of January. Prior to this the Dow 20 had traded within a trading line for nearly a year. It was perfectly clear to Dow Theory aficionados that the momentum and the direction of any breakout from this “range line” would be highly significant. The 307 point follow through move on the Dow Industrials on the same day as the Trannies breakout confirmed the trend. With Dow Theory  “ a trend once in place continues until both indices confirm otherwise”. Nothing has happened in the last few days to alter this January bull move. Thus the correct trading strategy at the moment is to go long on pullbacks not short “potential” tops.

Dow Industrials: Daily

Dow Transports: Daily

VIX: Daily

Italy’s election deadlock threatens chaos for the Euro.
Just as we thought the Euro crisis could not get any more bizarre Monday’s Italian elections have thrown another spanner into the works as reported below by James Mackenzie and Steve Scherer for the Irish Independent online on the 26th. February:

 “Italy faces political deadlock today after a stunning election that saw the anti-establishment 5-Star Movement of comic Beppe Grillo become the strongest party in the country but left no group with a clear majority in parliament.

The centre-left coalition led by Pier Luigi Bersani won the lower house by around 125,000 votes and claimed the most seats in the Senate but was short of the majority in the upper house that it would need to govern.
Bersani claimed victory but said it was obvious that Italy was in "a very delicate situation". Party officials said the centre-left would try to form a government but it was unclear what its options would be.
Neither Grillo, a comedian-turned-politician who previously ruled out any alliance with another party, nor Silvio Berlusconi's centre-right bloc, which threatened to challenge the close tally, showed any immediate willingness to negotiate.
World financial markets reacted nervously to the prospect of a government stalemate in the euro zone's third-largest economy with memories still fresh of the financial crisis that took the 17-member currency bloc to the brink of collapse in 2011.
Italy's borrowing costs have come down in recent months, helped by the promise of European Central Bank support but the election result confirmed fears that it would not produce a government strong enough to implement effective reforms.
Grillo's surge in the final weeks of the campaign threw the race open, with hundreds of thousands turning up at his rallies to hear him lay into targets ranging from corrupt politicians and bankers to German Chancellor Angela Merkel.
In just three years, his 5-Star Movement, heavily backed by a frustrated generation of young Italians increasingly shut out from permanent full-time jobs, has grown from a marginal group to one of the most talked about political forces in Europe.”
This stunning election victory by Grillo is an indication as to just how desperate and frustrated European voters have become.

The 5- Star movement is hardly a political “party” in any sense of the word. It is only five years in existence, most of its candidates have no political experience whatsoever and it has no central office or management structure. Yet it has managed to achieve the largest vote of any party in the third largest economy in Europe.

In essence, the victory of Mr. Grillo is a protest vote against the main parties who have allowed Germany dictate an economic policy that saves the banking elite but grants the youth of Europe a life sentence of unemployment.

This youth have called the European Central Bank’s bluff. It remains to be seen what the next move will be from Frankfurt. Yes it can reiterate Chancellor Merkel’s plea for continued austerity but to continue to go down this avenue could be social suicide for Europe as a whole. The 64,000 Euro question is can the ECB save the European Union and the Euro? I don’t think so. To achieve both would only be possible through the total disregard for the democratic process. Europe went disastrously down the path of negating democracy once before and may try do so again. I hope not. I pray that finally past financial policy errors will be recognized and that a new attempt will soon be made by the Council of Ministers to remake the European Union in its original vision. This vision understood Europe to be a society not just an economy.

What Europe needs more than ever are true statesmen or women with the courage to speak the truth and act with conviction. Europe is crying out for politicians of the caliber of Konrad Adenaur or Charles De Gaulle. These former premiers of post-war Germany and France respectively rebuilt their shattered countries through determination, leadership, bravery and integrity. The paths they lead their countries through were tough and arduous but Europeans followed  because they were communicated to with honesty and intelligence. This is not happening today.

With all due respect to the hardworking Angela Merkel, she is not in Adenaur’s or De Gaulle’s league. Dr. Merkel insists that the whole of southern Europe and Ireland succumb to crippling austerity. However, she has allowed her people forget that the rebirth of a new post-war German nation was only possible because a supportive American Congress forgave German war debt reparations and invested, through the Marshal Plan, nearly 1 trillion dollars (in comparable current GDP terms) into German and European recovery. Thus I fervently hope that the German people choose a new leader in the upcoming national elections. Should they decide otherwise, it will mean Europe could be heading for another half-decade of illogical austerity, social stagnation, media obfuscation and political chaos, Italian style.

By Christopher M. Quigley

B.Sc., M.M.I.I. Grad., M.A.
http://www.wealthbuilder.ie

Mr. Quigley was born in 1958 in Dublin, Ireland. He holds a Bachelor Degree in Accounting and Management from Trinity College Dublin and is a graduate of the Marketing Institute of Ireland. He commenced investing in the stock market in 1989 in Belmont, California where he lived for 6 years. He has developed the Wealthbuilder investment and trading course over the last two decades as a result of research, study and experience. This system marries fundamental analysis with technical analysis and focuses on momentum, value and pension strategies.

Since 2007 Mr. Quigley has written over 80 articles which have been published on popular web   sites based in California, New York, London and Dublin.

Mr. Quigley is now lives in Dublin, Ireland and Tampa Bay, Florida.

© 2013 Copyright Christopher M. Quigley - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Christopher M. Quigley Archive

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