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Friday, May 15, 2009

Deflation For Dummies

On the weekly chart for the SPX, we can see a clean rejection at the 40 week moving average, and stochastics getting into overbought territory and reversing. This week's drop was pretty large, but volume was jsut above average. I drew lines at the weekly close from last week, and the weekly low close in November, split the difference, and came up with a midpoint that is awfully close to 857, which has been a point of significance for several months now. I suspect my "split the difference" method is way to simple to be of value in finding significant levels, but, at least frot the last couple of weeks, it's worked fairly well on an intraday basis.

I posted the daily to show today's very low volume, but it's interesting that the November weekly low close and the January daily low close are almost identical (actually I haven't checked the exact numbers, they may be identical, which would be way too spooky for me to handle). I put the same lines from the weekly chart onto the daily, and the do line up with some pretty important levels.

The Nasdaq weekly shows serious reversal signs here. Stochastics are now heading down, and volume, while not as high as recent up weeks, is still significantly higher than average. The lines experiment did not go so well here, but it is hard to judge whether the bottom line should be at the November or January low closes.

When the Russell 2000 drops, it drops big. Still, it has only a small amount of down side momentum, which means it can drop a lot more. I drw the lines here from the November low close, and it actually doesn't look bad. The center point roughly coincides with the 10 week moving average.

Well, I'm at a quandry here. The relationship between the dollar and the market, though not exact, has usually been dollar up=market down. Although I'm not anything near an expert on why, the simple explanation is that more dollars in circulation=less value per dollar=higher prices (stocks and everything else). Less dollars in circulation=more value per dollar=lower prices. When you have a lot of bad debt in the system, the market wants to get rid of it by destroying the excess money in the system, which causes prices to fall across the board. That is the "deflation for dummies" explanation of what the market has been trying to do. Mr. Bernanke, who is much smarter than Mr. Market (he has a PhD, after all) is trying to do the opposite. By creating more money and more debt, he believes he can solve the problems created by too much money and debt. Good luck with that, Ben.

I'll have the new highs update shortly.

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