Death Cross Indicator
Research for Online Investors

by John Dalt

3/24/10

One of the indicators traders look for is when a stocks 50 day moving average crosses below the 200 day moving average.  This is popularly called a “Death Cross.”  I look at this as a “Kiss of Death” when I come across it.  It is especially powerful when other indices and the general market is moving up, but one stock or etf is ‘breaking down.’

The last few days we have written about China and the accusation that they manipulate their currency for an advantage in trade.  We have also hinted at the problems facing China.  When a country artificially maintains a low exchange rate, the money just piles up in government coffers.  If spent outside the country, the result will force the currency into balance with other currencies. China has stimulated their economy during the last year by building roads, train routes, and malls to suppress unemployment.  This spending was in excess of demand and there is sentiment building that China may be creating a bubble that will pop.  One of the nemisises mentioned is in REAL ESTATE.  China has stimulated demand with full employment, and housing prices have increased.

ETFs give us a way to check investor sentiment.  This morning I checked the FXI etf.  This is the China 25 index etf.

In late February 2008 the 50 day moving average crossed below the 200 day moving average, then moved back above in May of 2009. What happened earlier this month? The 50 day moving average moved below the 200, again…a Death Cross.  Also, look at the MACD, it is breaking over to move lower.  It is hard to see on this chart size, but the black line has broken below the red line.  It will pull it down like the reins on a quarter horse.

The FXI is trading at $40 and change today, support is at $37 from last month.  If it busts through, you get a ride to $31.50  Shorting stocks isn’t for everyone, but you will find the movements faster going down than up!  I don’t know that I will recommend this in the SwingTrader, but will watch it for the future.  If you want to know if/when we enter it, you can subscribe here.  You may also want to look at any Chinese stocks you own, as they may get sucked down with the Chinese market.

The market is off today on news of Fitch downgrading Portugal's debt.  The market is eerily following some of my thoughts yesterday.  Oil and gold are off, the dollar is stronger, but interest rates are up.  Lest I be misunderstood, I believe the value of the dollar has been destroyed by actions taken over the last year and a half.  The President still has two and half years to push us closer to Utopia, and bankruptcy.  The bankruptcy is certain at this point, and I don’t see the political desire to stop spending.  The contrarian trade we talked about yesterday was only a TRADE, not an investment.

If the dollar gets stronger, it will be fleeting.  But trades are made on short term considerations.  Investments are made on long term trends.

If yesterday’s ideas prove correct there is money to be made selling gold now.  If the long term thesis of dollar destruction is correct, then there is money to be made buying gold, oil, and other commodities when they get cheaper in a few weeks or months.  The timing is important as bond vigilantes, traders and investors adapt to information.  It may take some time.  Good trading…and investing.

To the mailbag:
“I usually agree with your analysis, not this one. You, I'm sure, know why. If you believe in gold/oil connection, you have equally made the case that oil is undervalued.  However, that is not the case. The government printing presses will drive up the price of all commodities simply because they are denominated in dollars. Historically gold is the haven in uncertain times.” ---subscriber E.K.

John’s response:  I agree with you, the dollars destruction is sealed.  But, I think there is a chance this trade might develop.  Watch for money flows to U.S. Treasuries.  Remember, I called it contrarian; the gold/oil inflation trade is very crowded.  Sometimes it pays to look at the market from a different angle.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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