With a Fed statement coming Wednesday, many believe the bulls need a formal announcement of QE3, which may not be the case. The odds are extremely low the Fed does not deliver at least some market-friendly language in their July/August statement. They do not need to announce QE3, they just need to hint at it. QE2 was hinted at in late August 2010, but not formally announced until early November. In 2010, the markets did not wait for the formal announcement (see chart below). As shown via the numerous weekly bullish signals in the remainder of this article, the markets may be following the bullish script from late summer 2010.
On July 30, we showed bullish signals from two easy to use indicators, RSI and moving averages. Today, we show bullish “crossovers” on the weekly charts of numerous markets using an indicator known as MACD.
Since it can give some powerful signals relative to a change in trend, MACD is one of the most widely used indicators by traders and money managers. MACD stands for Moving Average Convergence Divergence, which sounds intimidating. In the real world, MACD is very easy to use.
A bullish MACD cross occurs when the black MACD line moves above the red line. According to Dr. Alexander Elder in Trading For A Living:
MACD crossovers identify shifts in the balance of power between the bulls and the bears. When the black MACD line rises above the red MACD line, it shows that the bulls dominate the market, and it is better to trade from the long side. When the black line moves above the red line, it gives a buy signal (see green arrow below).
The S&P 500 Index (below), like the Dow above, has an encouraging look to its weekly MACD. The MACD Histogram is also telling us to be open to bullish outcomes since it is rising (see blue bars).
Central bankers want to avoid deflation and create positive asset inflation to assist impaired global balance sheets. The recent signs of life in gold (GLD) also support the bullish case.
In Short Takes, we often point out that weekly signals are more meaningful than daily signals. Therefore, a weekly MACD cross is something we want to be aware of and account for in our portfolio allocations.
Some of the charts shown here have “locked-in” a MACD bullish cross by closing last week with the signal in place. Some of the markets have not yet seen a weekly close with a bullish signal from MACD. If the signal carries into the end of a week, it is more important.
Since all indicators can be “whipsawed” or give false signals, it is important to have a “what happens if I am wrong” strategy in place.
You do not need to be an anchor at CNBC to know Europe has some financial problems. Notice how clear the bullish MACD cross is on the weekly chart of the Euro Stoxx 50 Index below.
If central bankers print more money, it may take some of the short-term pressure off Germany to write additional bailout checks. The weekly chart of the German DAX below is a welcome sign for all risk assets.
Emerging markets have been laggards for quite some time. When the laggards begin to perk up, it can be a sign a rally is in the cards.
Economic growth in China has slowed noticeably in recent months. Chinese stocks have been significant laggards since late 2010. The FXI ETF below is trying to complete a bullish MACD cross. When laggards show some strength their “bounce back” rallies can often be significant.