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By Chris Rowe - Creator: Technical Analysis Millionaire
On many Tuesdays (the day I write for The Tycoon Report), before the article, I will list one or two "test your knowledge" technical analysis questions and after the article I'll list the answers. I hope you find this fun and I hope it helps you make more trading profits. Sometimes small bites can have a huge impact.Technical Analysis Question of the week:
Which momentum indicator am I describing?
This indicator compares the strength of the price action of a security to its own historic price action. This indicator gives overbought Sell and oversold Buy signals, oscillating between 0 & 100. As is the case with nearly all indicators, you can use any number of time periods to adjust the indicator to work with the time frame that you are studying. Below is the calculation:
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After the election, will the stock market crash?
I doubt it will "crash" ... but watch out for 2013.
It's best to walk down "History Lane" to reveal what historically happens in times like this -- once the president is re-elected.
First, remember the election cycle is a 4-year cycle.
1. POST-ELECTION YEAR
2. MID-TERM ELECTION YEAR
3. PRE-ELECTION YEAR
4. ELECTION YEAR
But according to a study in the Stock Traders Almanac, since 1833 the first two years (the two years AFTER the election) only generated 262.1% while the last two years (which lead up to the election) produced 718.5%.
Why?
The stock market trades based on future projections of the economy, and elections obviously have an enormous impact on the economy.
The Stock Traders Almanac says:
"Some of its most significant patterns have been at the start of wars and bear markets mostly in the first and second years of presidential terms and the bullishness of third years -- with not one losing third year of a presidential term since 1939."
As we've seen over the last few years, the stock market has advanced significantly on Fed stimulus. The problem is that the economy, not just the stock market, is supposed to be stimulated by the Fed. Instead, corporations are sitting on a record amount of cash and are afraid to spend, which is typically a precursor to a coming recession.
Typically, pre-election years and election years are up years.
Typically, the administration in office keeps voters as happy as possible, even if it means sacrificing a bit of economic pain in the future (after reelection). They increase benefits and get federal spending and disposable income up while keeping interest rates and inflation down.
But, as Stock Traders Almanac points out:
Bull markets usually last 3-4 years, while bear markets usually last 1-2 years.
Stock Traders Almanac continues: "Bottoms often occurred in the air of crisis: the Cuban Missile Crisis in 1962, tight money in 1966, Cambodia in 1970, Watergate and Nixon's resignation in 1974, and the threat of international monetary collapse in 1982."
Understanding that bear markets seem to show up during the two post-election years is important when you're in a stock market that's breaking highs while in an election year.
Perhaps even more concerning is knowing that major military involvements occurred during midterm years.
* World War I
* World War II
* Korea
* Vietnam
* Kuwait
* Iraq
As I mentioned over the last couple of weeks, we are likely near a long-term stock market peak. Will we see that peak in the months after the election? It's hard to say. But, typically, the last part of October through the end of January are strong months. The market has sold off in February - March in recent years, and when the market has been able to continue higher, it's been topping out around April.
The market has been manipulated higher for years, but since December 2011, markets have been moving higher on very light volume. That's a clear sign of price manipulation as opposed to real demand.
The chart below shows (on the bottom right) that low volume. I also drew a green horizontal line across that volume range and I extended the line to the left so you can compare historic volume to that of the last 10 months.
Then, I drew vertical red rectangles to help you compare times when volume fell short of the horizontal green line, both before and after December 2011. Notice, prior to December 2011, how that light volume near highs was followed by sharp sell-offs. Now notice how, with market prices much, much higher, we are seeing very low volume.
I can't give you a prediction of exactly when the peak will appear. But while demand appears to still in control of the stock market, I can tell you that history certainly suggests that we are close to a long-term market top.
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Answer (to TA question from above the article):
The "RSI", or Relative Strength Index (not to be confused with comparative relative strength, which compares one security to another), measures the relative strength of a security against itself.
In other words, it compares the current price action of a security to its historic (usually recent) price action, indicating whether the momentum is strengthening or weakening.
Here is a link to a Tycoon Report article I wrote on the indicator: "How to Sell at the Right Time"
He released an incredible video yesterday about how you can spot that next great stock... while it's still cheap to own.
I was glued to my screen from start to finish, and if you haven't seen the video for yourself, you should check it out now by clicking the link below.
Watch the Video Here >>
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An internationally respected authority on options, 9-year Wall Street veteran, and co-founder of Institute for Individual Investors, Chris Rowe spun out profitable trades for his Trend Rider members for 7 years, ending with his retirement in 2012. While most professionals consider an options trader who is right on 3 of 10 trades to be very good, Chris was right on the majority of his trades! Now, through his weekly "Technical Tuesday" Tycoon Report articles, Chris Rowe helps hundreds of thousands of investors across the globe, demonstrating the benefits they'll realize by taking a dispassionate, business-like approach to both stock and options trading. In his thorough and detailed, yet easy and accessible courses, you'll learn directly from Chris how incredibly easy it is to consistently make money - in bull markets, bear markets and flat markets - when you use a proven system for trading success. |
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