Business-Insider

I've found something interesting that I think you'll find interesting too. It's a fairly rare circumstance-I can only find 3 instances of it happening on the daily chart going all the back to October 2003 before it happened again on Friday.

If you use Stochastics at all, you know it indicates overbought/oversold conditions. The Stoch indicated an oversold condition at the market low back on Jan. 22 but what's interesting is that it's indicating an oversold condition for the second time at Friday's close, which is at a higher price then the Jan 22 close. That's a bullish sign, because the Stoch is saying price is still a bargain even though it's risen.

The only times I can find the Stoch forming similar patterns were in Oct 2003, Aug 2004 and July 2006 (see charts) and each incidence of this was followed by a strong rally.

I looked for the opposite too-times when the Stoch indicated an oversold condition for the second time at a higher price and found that each time, instances of strong selling occurred after that. There's an instance of it on the DOW and S&P chart in November, right before the plunge.

Obviously at this time, the markets are very volatile and therefore sensitive to new information. The potential for a new shock to the system is there and certainly if one appears, the market can be knocked down further. But given the present set of circumstances, I believe the potential for a rising market is there.

What are the present set of circumstances? Well, everyone knows about the recession, housing is expected to weaken further and no one is all that positive on consumer spending. The Fed is expected to continue slicing the overnight rate.

What constitutes a new "shock" to the system? Well, Goldman, Morgan, Merrill, PIMCO et. al. have already said the economy will contract in Q1 08 and has probably entered a recession, so more recession news won't do it and I don't think more lousy housing numbers will either. The bad retail spending number we'll see this week has to look seriously bad to shock the system, IMO. (I found an excellent chart that correlates the ISM and consumer spending that I'm going to post this week).

Another negative NFP certainly won't help and if the UE rate ticks back up another 0.3% that will be a shock. A second contraction reading in the non-manufacturing ISM would scare me. Certainly the collapse of a major commercial bank or large brokerage would (highly unlikely). A downgrade of either MBIA or Ambac would also be a shock-but that's also unlikely despite the continued threats from Moody's. The bond insurer situation is certainly one to follow closely because a downgrade will force the banks like Citigroup and UBS to take additional write downs onto their books, putting further pressure on fragile credit markets. In addition to that, problems are developing in other credit markets besides those for mortgages: commercial real estate, leveraged loans, student loans and credit cards. Those products were structured and sold off just as mortgages were, potentially leaving bond holders with additional write downs and if these markets deteriorate, which will put further pressure on the bond insurers. Last but not least, the Fed holding in March will take the air out of any rally, unless nearly every piece of economic data between now and then beats the consensus.

Currency Implications

As we have seen in both rising and falling equity markets, the JPY crosses are highly correlated to their movement. In a rising equity market, the dollar will tend to weaken vs the high yielders as it gains on the Yen, which causes the JPY crosses to rise. We've seen this correlation hold true again as equities have fallen over the last several months-the bear dollar market died with the fall of the equity markets. GBP/JPY has fallen right along with equities-about 3000 pips worth.

Here's a research note from Morgan Stanley that was published on Friday:

"As the stimulus from the tax cuts and massive Fed easing filters through, the US economy should get a lift in the summer, and our US economics team is forecasting a healthy 4.5% annualized growth rate in the Jul-Sep quarter. That would make for a mild and short-lived recession in the US."

And something else:

Hedge Funds May be Scenting Market Turn
http://www.reuters.com/article/hedge...75227620080207

It looks like equity markets, which look 6-9 months in advance, could be starting to look 6-9 months in advance (or at least Morgan Stanley is).

Thanks for reading my post and please vote. Please consider giving my ten dollar per week trade room a try. There's no long term commitment and you can join on my blog: thenewstraderfx.blogspot.com

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