Tuesday, August 25, 2015

Dow and WTI Trends: SMA

How does sentiment change so quickly? The stock market is the most volatile arena in the world where feelings reverse and intensify in an instant. Going from losing 1000 points the day before, the Dow Jones Industrial Average shows a strong 350 point surge just 24 hours later. Investors flip from selling in bulk to buying into positions that seem firmer than they were just a week ago. Grou psychology is a funny thing. Earlier in the day when North American traders were sleeping, the Chinese market continued a bearish trend with losses as large as 6.4% at the opening of the market. Just a few hours later, the Chinese government enacted reactionary countercyclical monetary policy by reducing interest rates and bank reserve ratios. Just like that, the New York Stock Exchange erupted in a fit of bullish surges.Plotting various simple moving averages (90d, 30d, 7d) over the past 3 months allows the identification of various short term and long term trends that have been hard to identify in the Dow Jones this year.

The long-term 3-month trend line (black is very neutral with daily prices staying near the average while never straying too far above and below the relatively straight line. It's actually pretty hard to see because of the other plotted lines showing more volatility. The 1-month and 1-week lines (blue and yellow respectively) cross each other quite frequently as they react to various gains and losses during the year. As the 7-day average crosses the 90-day average, the week or so following the cross reacts with similar sentiment. An intersection and dip predicted a week of losses while bullish behavior centered around the opposite. For the month of August, the Dow Jones failed to reach 30- and 90-day levels hinting at a bubble in the overall price index. In fact, daily price movements fail to retain 7-day moving average levels. An intensified trend could have been projected with the signals of widening gaps between these three moving averages and Chinses sentiment. This is how an investor can identify a trend with simple moving averages. By comparing the velocity over directional movements with the use of intersections, the sustenance of a trend can be verified. Let's look at SMAs for WTI now.

The WTI benchmark has two major crossover points at the beginning of July where an intensification of bearish behavior with earnings week projected dives in crude oil price. At that point, the chart shows the 7-day average dropping past the 30- and 90-day averages. About a week later, the trend is solidified and the 30-day market drops as well. From then on, daily price movements cross over the 7-day trend only three times. From this, we can assume that speculation has not changed much at all. In fact, because the 30-day trend line is so much lower than the 90-day trend, WTI long-term sentiment might be just as bullish. For some recovery or at least some hope for higher prices, investors should be watching for the 7-day trend to challenge the 30-day trend. The same should go for the Dow moving averages. Volatility, with large increases in any direction, will still average out to no gains and no losses, Speculation has no direction then. A quick evaluation of a week trend versus a month trend using simple moving averages can be a litmus test for sentiment. In the case of the recent crash, the next week of data will be important for 7-, 30-, and 90-day SMAs as intersections (or no intersections) could speak for sustenance of a trend or be evidence for a correction in inflated prices. This will be important for the Fed to watch as they continue to ruminate over rate hikes. 

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