Technical Tuesday - Big Buy Signal Before The Fed Announcement

(By Chris Rowe) One of the smartest investors I know said "you can almost smell the quantitative easing in the air."

For sure, investors are fully focused on tomorrow's Fed decision, outlook and press conference. 

But, even ahead of the Fed's meeting announcement at 12:30, the FOMC forecasts at 2:00, or the chairman's press conference at 2:15, we will have a KEY indication of whether or not the stock market advances for another month.   

How?

There is an indicator that shows us the number of stocks that are above their 30-week moving averages. 

Although the indicator isn't very well known, many charting services do offer it.  We obviously offer it in our TAM tools package.  The difference with us is that we also have an entire lesson that teaches the importance of it instead of it just being buried in a sea of indicators with no explanation. 

Below is a super quick explanation, followed by the implications it's about to give us.

But before explaining this obscure indicator, I'll prep you with a couple of educational building blocks.  Even if this is obvious to you, it's important to review, so stay with me here...

A "moving average", which is probably the most popular indicator in the world, smooths the price data presented on a chart by averaging out the weekly closing prices.  They are useful to investors because they show the general direction of a stock or index without all the volatility that tends to confuse them.

Two ways that investors use the moving averages are:

1. They consider the direction of the moving average itself, and
2. They consider whether the security is above or below the moving average.

The "30-week moving average" averages the closing prices of the last 30 weeks.

Take a look at the weekly charts of Apple Inc., Exxon Mobil and Morgan Stanley, below.  The smooth blue line on each is the 30-week moving average. 


As you can see, when the stocks' long term trends are up, they typically reside above the 30-week moving average and vise versa.

When most stocks in the stock market start moving above their 30-week moving averages, practically at the same time, we know that odds strongly favor a general stock market advance. 

It would be like watching a school of fish in super slow motion changing their direction in unison.  You'd see a few move first, then a large group follow the leaders (almost in sync) and the rest (except a few) follow.  

Which brings me to the indicator that will give us a major stock market clue, even before the FOMC says anything tomorrow...



That's a mouthful, isn't it?  That's why we call it the %30-week, or %30-wk. 

This indicator can apply to any group of stocks.  For our purposes today, let's focus on the NYSE %30-wk (the percentage of stocks on the New York Stock Exchange that are trading above their 30-week moving averages).

When the indicator advances, we know that more and more stocks on the NYSE are moving above their 30-week moving average.  

As the stock market declined in the 2 months from early April to early June, the NYSE %30-wk declined from over 70 to 24.  This means that over 70% of stocks on the NYSE were above their 30-week MA in April, but in early June only 24% of stocks were above their 30-week MA.  Put another way, 76% were below the 30-week MA.  Put yet one more way, most stocks were in decline. 

But as of Monday's close, 38.38% of stocks on the NYSE were above their 30-week MA.  The indicator moved from 24 to 38.38.

I'm not going to dive any deeper into the mechanics of the indicator today.  Instead I'll invite you to get on the waiting list for the next Technical Analysis Millionaire course by visiting this link. 

I will say that all this indicator has to do to generate an "oversold buy signal" is reach 40.  That means only another 1.62% of stocks on the NYSE (net) need to move above their 30-week moving average. 

Just looking at the large rally in today's stock market, I'm 99.9% convinced that's happening today.  We will know for sure after the market closes.  In fact, I will tell listeners on tomorrow's Morning GPS call what the results of the day were.  

(I'll be on our Morning GPS tomorrow and Thursday with Ed Pawelec, so we will also be discussing the aftermath of the FOMC announcements and press conference and its effect on the stock market.  If you're not signed up with MGPS you can do so here). 

I hope you'll listen to the MGPS calls, but if not, I look forward to writing to you next Tuesday.