“Nearing” is an important word.

Federal Reserve Chair Janet Yellen said the case to raise interest rates is getting stronger as the U.S. economy approaches the central bank’s goals.

“In light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” she said in the text of a speech Friday to central bankers and economists in Jackson Hole, Wyoming.

She also said the economy is “nearing” the Fed’s goals of full employment and stable prices. The Fed chair didn’t discuss the specific timing of a rate move in her first public comments since June.

Yellen did not indicate when the U.S. central bank might lift rates, but her comments reinforced the view that such a move could come later this year. The Fed has policy meetings scheduled in September, November and December.

There is a lot of financial data to be released next week crested by the jobs report on Friday. All NFP data is important but this month’s payrolls number will be a game decider.

Yesterday the initial reaction from the market was good and the Dow shot up 100 points after the news. This gain was very soon reversed when the FED vice chair Fischer said on CNBC that the increase in rates could come as early as next month. The dollar advanced across the board. Once more we see that the cost of money in paramount in the minds of investors.

Fridays price action around and after the news from Yellen and Fischer has charted a very ugly reversal candle on both the USA and UK stock markets. The bar/candle pattern is known as a bearish “outside day”. It normally precedes a further selloff.

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In the UK the Ft100 pulled back over the last week (started last Thursday 18th August) to the last old top charted towards the end of July 2016. This was the 6770 level that I wrote about here for what seemed like months. From this level the Ft100 bounced with the Dow on Friday afternoon but in a similar way to the USA gave up all the gains before the London close.

Many cast doubt on the willingness of Janet Yellen to put up rates ahead of the US Presidential Elections. This would not help her fellow Democrat, Mrs Clinton a great deal.

The VectorVest Composite of the UK remains in a Down/Up situation. The first word refers to the Primary Wave or the short term trend of the UK market. The second word refers to the underlying trend and that’s been UP since the third week of February 2016. The Primary Wave has been down since Thursday of last week the 18th August.

As you know, in addition to the share trading reported here, I also take intraday trades on the Ft100, based on a 30 minute chart. These are attempted when I have both the time, focus and inclination. I take intraday trades only in the direction of the Primary Wave and thus have only been taking short positions since the 18th. I was short on Friday afternoon after the initial surge upwards reversed. As any keen FIB scholars would expect, the Ft100 reversed at a 62% retracement of the last 30 minute range after charted a rather ugly, but still valid, Gartley 222 pattern.

On the VectorVest Composite the underlying trend remains strong with the magic MTI indicator falling but still well above its threshold level of 1. The MTI is currently at 1.44 falling from a high of 1.63 on August 15th. As discussed in this blog an MTI reading of greater than 1.6 invariably precedes a selloff. Thus the Primary Wave turning down since the 18th was no great surprise.

The DEW market timing system is still “long” of the UK market. This simple but robust market timing model uses a 30 day weighted moving average and a momentum study called a Detrended Price Oscillator (DPO) to gauge market direction. If the Composite should fall below the 30 day average and the DPO falls below its threshold level then a sell signal for the market is printed. This market timing system is slower to react than the Primary Wave but has a faster response than the underlying trend. If the market continues to fall there can be a DEW sell signal in the next week. This would be a stern warning that the selloff is getting serious and I will consider taking profits at this point. Please watch for this signal over the next few days.

If you load a chart of the VectorVest Composite, just use the drop down menu (below the chart) to display the DEW Buy and Sell signals, automatically on the chart. If you struggle with this, then that’s the perfect time to get acquainted with the support staff at our call centre. They will talk you though this vital exercise and can be reached at 0800 014 8974 in the UK and on 0800 981891 in South Africa. It’s a free call. You really need to know whether the market is going UP or down as everything follows on from that.

I have held all the shares in my portfolio that I have discussed here over the past few weeks. Fevertree and Hill Smith are extended from their base and open profits in these shares need to be carefully managed. If your strategy is that of a swing trader then you should have taken profits already. If you are a position trader then let profits run and manage the risk via a trailing stop loss. The London User Group calculated that a 16% trailing stop was optimal some years back.

In the past two weeks I have added a new position in the Hastings Group. The share is undervalued by the market according to the calculations on VectorVest and growing earnings aggressively and safely. The earnings potential (RV) is a very impressive 1.52 and it’s my belief that this number drives the share price. The share is on a BUY recommendation on VectorVest and with a CI or Comfort Index of 1.41 the longer term trend is strong and positive. The share had a very good day on Friday. The chart of the Hastings Group is shown below.

david

I am now invested in 8 shares on the London markets. These are Hill and Smith, Fevertree, JD Sports, Cranswick, Hastings Group, RSA, Keller and Trifast.

Cranswick pushed through the 24 pound barrier on Friday. This level has been a ceiling for the share for many weeks. Trifast is moving slowly but surely, as it casts off the spell around the 52 week high. I expect great things from this excellent small company.

Please be careful with open profits.

David Paul

August 27th 2016

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