Saturday, June 19, 2010

Quantifying the Uncertainty

I have posted several times in the past 10 days about the uncertainty in the market lately. What the F$@K is Going On on 6/10
Crossroads Uncertainty Indecision...Not the QQQQ's (dead wrong on this so far) on 6/13 and
Why is Sentiment Seemingly so Mixed? on 6/16. Let me illustrate this from another perspective using the relationship between the 20, 50, 100 and 200wk SMA using the weekly chart of the Financials Select Sector SPDR, ticker: XLF

Notice that the 20wk and 50wk SMA's create a range that has been open for quite some time and the 200wk and 100wk SMA's also create a range. This in itself is not all that unusual. Also the 20/50 range is tighter than the 200/100 range. Also not unusual. You would expect that the 20/50 range would be narrower than the 200/100 range. The shorter SMA's react to price changes quicker. Now notice that the 20/50 range is now within the 200/100 range. Also not that interesting as the shorter SMA's range is narrower than that of the longer SMA range it easily fits inside.

What is interesting is how this happened and where these SMA's and ranges are going from here. First, the 20/50 range crossed up into the 200/100 range. This means the 20/50 range has been rising and you can see this from the chart. Second, the 200/100 range has been falling. This can also be seen as both SMA's drop from the top of the chart. The important point to take away from this is that in the short term prices have been rising while they have been falling in the long term. think about what that means. Shorter horizon investors are feeling happy as their positions have been increasing in value, but many longer term holders are not feeling the same way yet and some are underwater. How would you look at your investment/position if you were in each of these groups? Final point to note is that the 20/50 range has been narrowing, showing that the price action is leveling at least and maybe falling.

This all equals uncertainty, indecision, a range bound market, whatever you want to call it. But that was just the XLF, right? Actually of the 9 sector SPDRs I had 5 to choose from for the chart where the SMAs stacked up 100/50/20/200 and an overlapping 5 (but not identical) where the price was within the 20/50 range and 1 more where the range was to tight for that to happen.

Sorry only 1 picture on this post and lots of words. If you want more pictures check out the charts for the other sector ETF's on my twitter @harmongreg or on on stocktwits.

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