PMI are economic indicators that originate from surveys conducted on a monthly basis of private sector companies. The two principal producers of PMI’s are Markit Group, which conducts PMIs for over 30 countries worldwide, and the Institute for Supply Management (ISM), which conducts PMIs for the United States.
The PMI gives us an indication of the economic health of the manufacturing sector. The PMI index is based on five “sub-indicators”: new orders, inventory levels, production, supplier deliveries and the employment level.
A PMI reading in excess of 50 represents expansion of the manufacturing sector, compared to the previous month. A reading of less than 50 represents a contraction, while a reading at 50 indicates no change. Although the ISM publishes several indexes, the PMI is the most widely followed and is sometimes referred to as the ISM index.
However, there are many factors to consider here. Firstly, the PMI only covers the manufacturing sector so it doesn’t represent the health of the overall economy as it focuses on one sector only. Secondly, the survey conducted is very subjective in its data retrieval compared with other leading indicators. Finally, reports released earlier such as the Philly Fed and Chicago NAPM may strongly correlate with the PMI report and therefore can often take away from the potential impact.
We as technical analysts prefer to remain objective focusing on price action and identifying probable breakouts in the market place. We specifically target markets that are range bound for prolonged periods of time and when such a market finally breaks out of that range, the breakout tends to be aggressive. The patience required waiting for these breakouts to occur rewards the trader handsomely when it finally materialises.
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