Thursday, April 17, 2008

The bullish thesis for a rally: a technical indicator review.

While we could be in for a rough period for the remainder of the year, there is a growing conviction that at least an intermediate term bottom has been set, and we could be due for a rally. A few indicators point towards increasing risk appetites amongst investors. Here's a review of some of them:

  • The yen carry trade(JPYUSD) trade is extremely oversold right now, and below 200 day MA. There's always a reversion to the mean with respect to the 200 day MA. Resumption of the carry trade has been bullish for equities in the past.

  • Tips look like they've entered a period of downtrend, indicating growing risk appetites.

  • Bond yields rallied and broke their downtrend, at least for now. (Hat tip: Bespoke group) Previous bear rallies failed at this level. That's a positive.

  • S&P broke through the 50 day MA decisively and has been making a series of higher highs and higher lows since the March lows.

  • VIX in some sense anticipates future stock market volatility. The 200 day MA has acted as support ever since the credit turmoil began. VIX dropped below the 200 day MA. This should imply lower volatility for the next few weeks, which in turn is bullish, assuming of course that it stays below the 200 day MA. It looks like a correction in the long term upward trend in volatility (that's not a clever way to look at this though) .

  • Credit default risk on the investment banks has declined dramatically. (Hat tip to the excellent folks at Bespoke again) Is it time for a rally in the financial sector?
  • Traderfeed has some more thoughts on why we could have hit a market bottom.

If Dow Industrials can close above 12,750, it will trigger a Dow Theory buy signal. (Refer to this post on the strength of the transports). Alongwith a break of the S&P 500 above it's overhead resistance at 1390, that should pull in new money, and help the averages up another 5-10%, if we can close above these numbers.

Disclosure: None