The Wall of Worry

The London stock market as measured by the top 100 shares has left the 6770 level, which I have been discussing here, well behind in the week ending Friday 12th August. The next objective for the Ft100 index is the April 2015 high at 7110. The ft100 index closed 1 point up on Friday at 6916.

In the US all of the main indices made a new high during the past week. The low volatility of July was cast aside as animal spirits reentered the fray. The reverse divergence between the 14 day Stochastic and the cash price of the Dow forecast the move, as discussed here last week. Reverse divergence, hidden divergence or a slingshot are names given to this excellent technical setup. It occurs when the price makes a rising low but the Stochastic charts a falling low. The setup is a continuation pattern and it precedes a resumption of a trend after a pullback. On Friday after hitting the record highs on Thursday the indices drifted lower. This was on the back of a poor retail sales number and producer prices that were weaker than expected. The Dow Jones cash closed down 37 points.

Back in the UK the VectorVest Composite UK which is much broader measure of the market than the Ft100 (all 2200 shares that VectorVest follows on both the LSE and AIM) has already left the April high well behind. As I write after the close on the 12th August the underlying trend of the UK stock market is UP and the trend has been confirmed by price action. This signal known as a Confirmed Call and it has been in place since the end of February.  The Primary wave (short term trend) is also UP and that signal has been confirmed the RT kicker timing system. This just means that a short term signal from price action has occurred and that short term momentum is also rising. The Color Guard has been a sea of green all of the last week showing that the price of the Composite, the momentum of the Composite and the breadth of the Composite are increasing both day over day and week over week. An exceptionally healthy trend following view.

The Market Timing Indicator (MTI) is the basis of defining the direction of the underlying trend. The MTI is an oscillator that’s mathematically massaged to fit between 0 and 2, akin to all metrics on VectorVest. It’s a momentum indicator of the price of the VectorVest Composite and the breadth of the UK market as measured by the VectorVest proprietary BUY/SELL ratio. The latter two studies are then combined into a single oscillator which is the MTI. Simply, when the MTI is above 1 the underlying trend is UP and when below 1 the underlying trend is DOWN.

The MTI also possesses strong leading characteristics when the study becomes overbought and oversold. Years of patient observation have shown that when the MTI is 0.6 or less that’s it’s a good time to be buying shares and when the MTI is greater than 1.6 that’s it’s a good time to be wary.

In the last few years the MTI has called the market lows and highs exceptionally well. It advised to buy shares at the lows of October 2014, in late August 2015 and in mid-February 2016. I would advise starting to build positions slightly after the low when the turn upwards has been confirmed by green lights in the Color Guard. For position traders this can easily be a standalone system.

In the UK a value on the MTI of 1.5 found the top in April 2015 and the pre Brexit high in April. At present the MTI is at 1.62 and that’s a time to be wary. I will certainly be keeping my eyes peeled on the Color Guard, riding this trend for as long as it runs. If the short term trend should turn down, then there could be quite a nasty pullback, with the market so extended. The VectorVest Composite and the MTI are shown below.

david

The main threat is from Europe and largely bankrupt Italian banks. Growth in the EU especially in France and Italy has fallen till its lowest level since the middle of 2015. These numbers will be especially disappointing after the extent of the stimulus and action on interest rates taken by the ECB.

Market professionals make use of the CBOE Vix index to measure investor sentiment. The Vix which is a measure of expected equity volatility is known as the Wall Street fear index because it moves inversely to investors risk appetite. The sight of the Dow making new highs while the VIX moves lower unnerves the Street. When the Vix falls to its current levels traders worry that market participants are becoming much too optimistic about the future. I have watched the Vix for many years and have a signal on the study based on a Bollinger band. This has recently given me a signal to be very careful.

My shares have all had a good week with Fevertree and Hill and Smith leading the charge. I have held on to Keller. The share has traded a Doji or indecision candle in the 10/20 weekly zone. If this is confirmed by an up week, bullish candle, then we have a Buy signal and the opportunity and permission to add.

The trend seems to be turning upwards on Gleeson after the disaster at the vote although official figures show that the construction sector in general has moved into recession. Annualized output in the construction sector has fallen each month so far in 2016. Gleeson is far removed from high end builders in the south of the country but they all tend to be tarred with a single brush. If markets turn south then care and focus will be needed in this share.

On the Pound Dollar exchange rate 1.2930 is a key level. This is 78% of the last range and as I write just after the LSE close the pair is trading at this support level. If this level fails to hold then I fear a sudden and quick move to 1.25.

I am hoping that the trend in the stock market has another month to run to take the Ft100 over the April 2015 high. However with the MTI and the Vix at these levels caution with open profits is needed. Stay in the moment and for end of day traders that moment is quantified by the Color Guard. In this moment all is good.

David Paul

August 12th 2016

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