Stocks to Accelerate Losses this Week…
by Jes Black
October 25/04
The Dow Transportation average climbed to a new five-year high on Friday of 3435 but suffered a bearish daily reversal and closed on the day’s lows. Meanwhile, the Dow Industrials closed at a new ten-month low, thus prolonging this non-confirmation between the averages to five months.
Recall that the only other divergence of this type and magnitude occurred
in 1977 for nearly five months as the Industrials struggled to overcome
the psychological 1000 mark before both averages headed down together
with the Industrials falling 27% and Transports loosing 20%.
As we alerted our subscribers, we deployed our bearish bets this month
when the Dow broke back below 10,000. If the Transports get in synch to
the downside we could see a sharp decline in the broader averages over
the next few weeks as we forecasted nearly one month ago. We feel this
is a distinct possibility as the Transportation average has recorded yet
another bearish divergence between price and momentum while the RSI is
close to breaking its uptrend line from the August lows, which is a typical
sell signal for a market as it approaches its final top.
Also note the divergence between the two measures of investor bullishness
at key inflection points in the market going back to February. Each major
peak and trough has seen a divergence whereby one heads in the other direction
just before the turn. Moreover, the most recent reading of Investors Intelligence
bullish percentage survey was 58.9% - the highest since the S&P 500
reached a two-year peak of 1163 back in March. As we see it, the market
should decline for the next two weeks as it did back in March, but if
that is the case, the US markets will suffer a major technical breakdown.
Meanwhile, the Bulls try to rationalize the market’s poor performance by blaming oil despite the Transports and Small Caps rallying along with record highs in oil. There is an Alice-in-Wonderland quality to it all and regrettably for the Bulls, time tested indicators like the Vix, and market sentiment measures don’t show extreme pessimism. If they did we would be buying.
Jes Black
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Jes Black, hedge fund manager at Black Flag Capital Partners, specializes in foreign exchange and global macro trends. Prior to organizing the fund he helped MG Financial Group launch Forexnews.com. Afterwards he went on to found FX Money Trends, a research firm catering to professional traders.
Mr. Black holds a degree in economics from the University of Kansas and
an MBA from the ESC in France. His market commentary is often featured
in the Wall Street Journal, Financial Times and Reuters. He has also written
numerous strategy pieces for Futures magazine. To find out more about
the fund’s research letter visit www.fxmoneytrends.com. Qualified
prospective investors can find out more about Black Flag Capital Partners
by e-mailing info@blackflagfund.com
Jes Black
FX Money Trends, LLC
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