Europe - United States Opting for Stimulus

George Brooks |

Wall Street Stock MarketInvestor’s first read - Brooksie’s edge before the open
Thursday, September 6, 2012 9:13 a.m.
DJIA: 13,047.48
S&P 500: 1403.44
Nasdaq Comp.: 3069.27
Russell 2000: 821.23

TODAY: The first hurdle appears to be behind us as it appears the European Central Bank (ECB) will approve President Mario Draghi’s proposal for “saving the euro” with the unlimited buying of government debt with maturities out to three years. This is necessary, he reasons, because ECB interest rates have been higher in at-risk countries like Spain and Italy since investors are factoring in the possibility of a breakup.

The ECB will likely “sterilize” the impact of its buying by withdrawing an amount equivalent to the purchases from the system so it will have minimal affect on money supply.

The next hurdle will be the September 12-13 Federal Reserve Open Market Committee (FOMC) decision regarding a stimulus plan for the U.S. economy.

Good economic news today, now on to the Employment Report tomorrow at 8:30.

The ADP Employment report: Up 201,000 jobs in August vs. a revised 173,000 in July.

Jobless Claims: Down 12,000 to 365,000 for the week ending September 1. The 4-week average is now 371,250.

One disclaimer though. Does Wall Street want good economic news? Hasn’t the stock market been rising in anticipation of a Fed stimulus? Does good news change that?

I doubt it, but don’t bet the ranch.

Looking beyond the near-term, I headlined my Tuesday (9/4) post, “Global Coordinated Easing.” That may be what is happening now, and that would be huge.

Efforts to boost economies in Japan and China will be needed to make that possible.

TODAY: The DJIA still needs to break up through 13,144 (S&P 500: 1413 to reverse a moderately negative pattern.

FACEBOOK and TECHNICAL ANALYSIS:

Technical analysis monitors the balance, or imbalance of buying and selling with a goal of anticipating the next move in a stock or the market and how far that move can go. It assumes that balance is a product of the overall investment environment, including dominant news, monetary, seasonal, political, fundamental, economic, historical, and psychological factors present and expected.

It is based on a broad number of theories, but it all boils down to the interpretive skills of the technical analyst.
Rigid formulas tend to be flawed over time, quantification elusive. There simply is no substitute for experience, objectivity and a willingness to gop contrary to the widely accepted position.

One of its most valuable tenets is the exploitation of extremes – simply stated buy when no one in their right mind wants to buy, sell when everyone including your hairdresser/plumber is making easy money.

I used technical analysis to conclude Facebook (at $34) was heading lower. Initially, I targeted $24-$26, but changed that to lower prices, ultimately $16.88 as its chart pattern failed to develop adequate strength in the mid-20s, even with a “bounce across $30.
I will continue to apply technical analysis. Clearly no one appears to have a handle on the fundamentals, so its movement is reliant on the balance of buying and selling.

The recent announcement termed a “buyback” prompted a rally.

Without believable news about management’s ability to monetize its user-base, I don’t expect the bounce to translate into anything more than a move to $19 - $20.

The part about “monetizing” is really fundamental analysis, the part about $19 is technical! Technical analysis WORKS, it is not flawless. Everyone should apply at least a basic amount of it. I was out near the top of the bear market and in at the exact bottom. I have been overly cautious about the market’s strength in recent months with mixed results based on “my” interpretation of technical factors, so it doesn’t work all the time for all people.

FACEBOOK (FB) at $17.73: CONCLUSION
The question here all along is where do buyers absorb all the stock being sold then turn its price up. I don’t see it as a game changer unless more announcements are forthcoming that shed light on how the company is going to monetize its user base.

There is a lot of supply between $19 and $19.50. Volume will tell the story. A huge influx of buying suggests Tuesday’s low of $17.55 was FB’s low. Without that, FB will test that low and I expect go lower.

I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. At some point, I will drop coverage. I would like to see readers through the full cycle, from the $34 where I picked it up as “going lower” down to a bottom.

George Brooks
*Stock Trader’s Almanac: More on this in coming weeks.
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The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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