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21
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I believe that charts and indicators are insights into collective emotions of market participants. I also believe that not everybody gets to read charts correctly. Even those who read them correctly, may not get them right always.
Even though I suck at chart-reading, I would like to believe that I can spot a person who has the knack to read charts correctly. I got attracted to StockTock to follow the chart-reading prowess of Craig. Even though Craig is not posting here regularly, I am stuck on this site for some great chart-reading skills form the regular posters.
While I am here and have posting privileges, I want to gather the insights of good chart-readers (in my opinion, of course) and periodically post them as a compilation. FYI, some of these posters post anonymously on StockTock Social.
S&P 500 vis-a-vis Dow Jones Transportation
Okay, I’ll admit that Oscar drives me nuts. I don’t understand why he and Cramer have to yell so much; maybe they got the habit from working on a trading floor, trying to outscream each other. That having been said, Oscar is much more worth listening to than Cramer. He cuts thru a lot of BS in this video. I am posting it here on the blog rather than as a stand-alone embedded video because I will add a couple of charts to try to do a better job than Oscar’s fuzzy video of showing what is going on. Anyway, grit your teeth and watch Oscar first, because this is useful stuff in the current market, especially if you are trying to key levered ETF trading off the moves in the S&P.
BTW, he calls the symmetrical triangle an Apex. It is a continuation pattern, meaning the current downtrend will resume after leaving it. Coil is another name for it. A bullish coil would continue an UP trend, not that we are likely to see too many on the multi-month scale Oscar shows any time soon.
Maybe that will all make the actual video easier to follow:
http://www.youtube.com/watch?v=xvQ6WMwbwyI
Key points:
- False breakouts: A false breakout, in this case, a bull trap, will often occur near the tip, then prices will reverse and fall back into the triangle, often making the REAL breakout out the other side of the triangle in the proper direction.
- The Dow-Jones Transportation Index tends to be easier to analyze than the S&P (no false breakout here) because it is not generally the object of as much speculative trading. $TRAN also has been known to lead $SPX, betraying $SPX’s next move.
- If the breakout were real and fated to keep rising, it would signal the end of the bear market, which Oscar (correctly, IMNSHO) refers to as ridiculous.
Here are parallel charts of $SPX and $TRAN:
Santa Rally
In general, market participants (mostly bulls) have a sense of entitlement. Every year the markets are expected to stage a rally during certain periods – Santa Clause rally, new year rally, summer rally. StockTock regular
In 2007 Santa Claus rally disappointed, and the technical indicator that cracked was the daily RSI breaking its uptrend line. MACD and STO negative divergence (my favorite tool!) clearly telegraphed momentum was waning. The sell-off began the day after Christmas (which was on a Tuesday) and it continued into the last week of the year. The cross of the 50ma through the 200ma on December 23rd lead to further selling into January as people started to realize the Bear market was probably for real.
As shown below, the 2008 picture is similar but not identical. This coming week is decision time. There are bullish signs such as the uptrend line has held and the 20ma has also held, but the momentum, volume, STO bearish diversion, and the pattern are suggesting that we may head south. Weekly charts have even more bullish signs which keeps enough bottom calling bulls putting positions on preventing a breakdown thus far.
Schweizer has updated his chart on VIX.
Commodities, Currencies and Credit markets
I always think that stock market is the outer most fringe of the financial markets, in which the core is comprised of currencies and credit markets. An isolated look at the stock markets doesn’t tell you the whole story.
For all the hoopla about Fed’s printing limitless dollars and the ensuing rally in commodities didn’t go far enough to push CRB index even above its 20 dma. The last few times CRB touched 20 dma, it got sold off hard. Will this time be different?
Another important commodity to pay attention to is oil, which is now below $35. Let me repeat, oil is now below $35. When hedge funds de-leveraged their oil trade, and the economy tanked a true picture of the worldwide oil demand has emerged. The argument that oil traded as high as $147 because of soaring demand from India and China is as phony as a three dollar bill. Surprise, surprise – the rise was mainly due to speculation and possibly manipulation. I believe that the truth about manipulation will come out, eventually. I do really want to know who were at Dick Cheney’s energy policy meetings held at the White House in 2001.
A sub $35 oil will have adverse economic, social and political effects in the Gulf region. Yes, the economies of the Persian Gulf do matter to the rest of the world. For instance, a lot of construction in Dubai has halted and their real estate values plunged.
Forget stocks. The biggest story these days is the dollar. To be more precise, it is the currencies. Purportedly Dollar, Yen, Swiss Franc are the most stable currencies around the world. When they fluctuate over 10% in 3 days (even as a knee-jerk reaction to change in policy) it means that the markets are not healthy. When ’stable’ currencies move that much in that short a time, stocks won’t have a prayer when the knee-jerk reaction is in fact an approaching freight train.
I follow Jesse’s Café Américain blog. Jesse, an astute market observer, set the S&P target of 740 way before anybody I know. He now predicts that dollar index could reach 54. If it gets there very quickly, I think stocks could get obliterated.
Regarding US Treasuries, it is very clear that the Feds are flattening of the yield-curve forcefully by aggressively buying the long-end or by forcing the participants to do so. By doing this, they accomplished one thing – bringing the mortgage rates down. The positive effect of this is that interest rates for Alt-A loans and pay-option ARMS which are about to reset will not be reset, thereby preventing some foreclosures. However, it will not do any good for the negative equity many of the home owners with these type of loans (or any other type of loans) are facing. The best option for those who are faced with negative equity is still to walk-away from those loans. Think about it, if your choice were to be between paying your kids tuition or to pay for the house that is not worth anything for you, wouldn’t you rather move to an apartment and let go the home.
This is Sick
Two news items over the last two days made me sick. First, the Feds are now giving up to $200b aid to hedge funds (read: free money if you can prop the markets). The second disturbing news is that the Japanese Government is going to support markets by buying stocks to the tune of $227b. At least they are not pretending to be free-markets anymore.
Summary
I do not know what the markets will do in the interim. But I am not yet buying the inflation theory. Fed printing will certainly have long term effect. In the immediate term we have a lot of other things to worry about – deflation comes to mind. When the game is this openly rigged, who will make money? I no longer have any confidence that I will be able to beat the system. That is because, there is no functional system any more. What we have is central bank-led chaos.
Excellent summary and insight, Mohan. Thanks!
love your posts Mohan. we dont have to look to the Gulf Region for adverse affects of $35 oil. production costs in North America are much higher than other regions of the world and this will shutter the industry hard. just look to Alberta, Canada and the Oil Sands. Billions of dollars invested as oil prices rose and many of these projects were not completed before the energy markets crashed. Alberta Real Estate Bubble is a certain burst. Alberta and Saskatchewan were the engine behind the economic boom of Canada. Take a look at the incredible parallels of the events leading up to the great depression for Canada: http://en.wikipedia.org/wiki/Great_Depression_in_Canada the events are IDENTICAL including the commodity bubble at the tip of the 10year growth period. Just sold our home in the Okanagan area of Canada. it is a feeder destination between Calgary (energy central) and Vancouver (mining/forestry central). dont think that our city has much hope as the mining and energy bubbles burst. our playground for the “thought they were rich” will become dead. some argue that we wont see deflation and only disinflation. will the government be able to bring this to a screeming halt? it hardly seems like it. momentum is an amazing thing.
What is ridiculous is the assumption that breaking north of the upper line on that chart is supposed to be a technical signal for the end of the bear market. In fact it is nothing more than an intermediate trend reversal. It could have absolutely nothing to do with the end of the bear market as there are intermediate term rallies within down trends that are long term.
A long term up trend will not be confirmed until and unless SPX closes above and holds above the 20 month MA.
December 21st, 2008 at 1:15 pm
Kenny,
Are you the same person who puts out these charts?
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3095409
And BTW. those are not negative divergences at that 2007 “Santa Rally Yawn”.. the indicators and price are both lower. divergence means, well just that “a divergence” the price needs to be equal or higher to the previous peak while the indicators are lower. At a bottom this will be in reverse. this shows that the momentum is diverging from price. Now this being said, we do not always get a true divergence nor do we always need one for a sell signal.
Now On your present SPX chart there is an example of a negative divergence between price and the stochastics.
another thing is that one of those charts called the present pattern a descending triangle. actually there is an ascending triangle that has formed lately on SPX. I have it labeled on my SPY 15 in chart on my public list. And yes I am the author of Kenny’s Lint.
One thing I have found interesting is the negative divergence between SPX and the NYSE. The NYSE has completed the 5th leg of the rising wedge with leg five making a higher high while SPX made a possible double top. NYSE hit the upper wedge line on leg 5 while SPX did not. But the NYSE is very close to the apex of the wedge and still nothing big happening on the downside so the wedges may not hold much significance.
All in all, I see wave (4) up move either over or will complete in the 950s or near 1000.
December 21st, 2008 at 2:46 pm
Kenny,
Great to have you here. I follow your charts regularly. Great work and you teach a lot through the charts too. Yes, I did my civic duty and voted for your charts.
The charts I presented are not mine. I know jack about charts other than some basics. I am one of those fundamentalists who only believes in the general direction rather than predicting intermediate swings. The general direction worked as long as intervention was minimal or ineffective. Now that this has become a “traders’ market” I believe that technicals are more important than fundamentals alone.
I don’t know enough technical analysis to pick a fight with you. But I do have one observation on EW. Do you strongly believe that we are in Wave 4? or 4 of 3? How credible is a wave count when one of the key bottoms coincides with the low of previous (2002) bear, that is 740ish?
Thanks.
December 21st, 2008 at 3:06 pm
I’m Kenny’s groupie too. Vote every day from different computers. Sharp analysis and jokes/drawings make me smile too.
Here are some bullish arguments or bullish and bearish arguments:
For the fundamentalists:
Cheapest Stocks Since 1995 Show Cash Exceeds
Markethttp://www.bloomberg.com/apps/news?pid=20601213&sid=anVFOwBD4e9Y&refer=home
Global Markets year end review, cheer or jeer.
http://seekingalpha.com/article/111686-global-markets-in-review-cheer-or-jeer
Jeremy Grantham, the grand old bear sees a spring rally: “He says that the market will likely continue to rally into the spring, and it “will be big enough to convince about three-quarters of the players that [the bear market] is all over.” However, he doesn’t believe it is over — expecting a “good rally and a different kind of decline, on the sheer grinding of bad news.” He expects something similar to 1974, where the market takes a step forward and a couple steps back, and is fed “a diet of ugly earnings”
http://blogs.wsj.com/marketbeat/2008/12/18/four-at-four-general-exhaustion/
For the TA crowd:
Stocks fire off a buy signal:
http://online.barrons.com/article/SB122953011588614299.html?mod=googlenews_barrons
Which Elliot 4th Wave are we in currently?
http://blog.afraidtotrade.com/which-elliott-4th-wave-are-we-in-currently/
Stocks hang on
http://www.internetnews.com/bus-news/article.php/3792561/Technical+Analysis+Stocks+Hang+On.htm
Week of Dec 22nd, Weekly outlook
http://www.insidefutures.com/article/90957/Weekly%20Outlook:%20Dec%2022,%202008.html
And for those that dislike TA:
http://www.fool.com/investing/value/2008/12/17/avoid-the-mistake-that-cost-buffett-8-years-of-bet.aspx
(send the hate email to Warren B. and Motley Fool.
)
And for those that are simply traders, here is a quote from Jesse Livermore:
“There is only one side to the stock market;….not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock market speculation.”
Good luck to all, Investors, Traders, Bulls, and Bears.
December 21st, 2008 at 5:44 pm
Great Brian… we need that balance.
Mohan,
Newthreads.blogspot.Com is a brand new commentary blog from my brother. I think you will like to check it out given his expertise.
December 21st, 2008 at 5:18 pm
Tom,
Thanks for the tip. Great stuff. I get the plain news from news wires and the inside scoop from some trusted blogs – most of them posted by industry veterans like your brother. Unlike the reporters, I believe bloggers don’t have to make a living with their report. [Of course, I am not talking about blogs on politics which are mainly driven by some ideology.] This is why the right blogs are more useful than a news wire. The trick is to find the “right blog.”
The next big calamity is not just commercial RE, prime and jumbo-prime residential RE originated in bubble states during 2003-2007..
so says Mr. Mortgage. As I have been saying here several times, this is a must read blog for everybody.
http://mrmortgage.ml-implode.com/2008/12/20/mortgage-debt-is-more-toxic-than-most-think-even-prime-loansmbs/
Most definitely wave (4) up in Primary 1 down. Unless I missed something about EWT, the coincidence is not an issue.
Oh yeah, thanks for the votes guys.
December 21st, 2008 at 5:34 pm
I second (4) down in primary 1. IMO, the $RUT has the clearest EWT picture of them of all. A symmetrical triangle in 4 of 3, (oct 28th) followed by a spike down on nov 21, to complete wave 3. We have been in wave 4 of primary 1, ever since. I don’t think we are done with wave 4 yet. I see many stocks like RIMM which are just finishing off their 3 of primary 1, last week. I am voting towards 1046 by January 22.
I also use some astro indicators, while the rest of this year may be a down week. I see dollar devaluation as a ’short-term’ positive for stocks. Infact Jan 5, we could see just that. Lets watch.
@mohan – I also disagree with your fundamental analysis. You say the dollar will fall and deflation will reign. Those are contradictory imo. The seasonal ‘positive’ cycle for treasuries ends by Dec 29th. The treasuries are toppy. I am more on the opinion that we will have a reflation trade soon, everything points to that. Oil is in wave 5 of C (double zig zag), since last week. Same for natural gas. I am guessing this will complete in the next couple of weeks.
The dollar bounce of the past 2 days, looks corrective (at least until now). The volume on UUP suggests the bounce is exhausting. Everything points towards a reflation january rally (Wave C of 4).
December 21st, 2008 at 6:00 pm
I don’t really claim that I know exactly how it is going to unfold. Nor do I think YOU KNOW how it is going to unfold.
But given the near-term data, I am assuming that – for the near term
a) job-losses will continue;
b) the wealth destroyed and unwound leverage is far more than the dollar pumped into the system – worldwide,
c) RE prices will continue to plummet because of (a) and (b)
d) personal and corporate credit defaults and bankruptcies will rise
e) credit will still be tight for a while due to a), b), c) and d)
All the above + perception of dollar dilution will precipitate some exodus from US-based assets (is not mass exodus) = weak dollar, and lower stock prices.
At some point the printing will match or exceed the wealth destroyed. That is when inflation shows it head.
I believe Bernanke’s experiment to invite inflation to avoid deflation will fail on both fronts. First we will have serious deflation and then run-away inflation.
You can print all you want but you cannot a) mandate higher asset prices, b) force people to borrow, and c) force lenders to lend to less creditworthy borrowers. Period. It takes time to get there. Not in January 09.
As with stock market – I think at some point the selling pressure cannot be controlled. If it is one man’s voodoo economic theory vs. mass psychology, I won’t bet against mass psychology.
December 21st, 2008 at 6:05 pm
Oh.. forgot – there is toooo much excess capacity in about every market – RE, electronics, you name it. when demand suffers due to credit crunch and deleveraging, capacity has to be take off line.
The lesson I learned by reading a whole lot about the Great Depression is that it could not have been stopped. The notion that Feds caused it or didn’t do enough is humbug. Also, Helecopter Ben was also a Fed governor. If he really studied Great Depression, he should have studied the causes for the collapse. He, as a Fed governor had the obligation to nip those developments in the bud. He failed then an no reason to believe that he will be successful now.
I believe that near-term deflation cannot be stopped.
December 21st, 2008 at 7:39 pm
Mohan, your logic is clear and concise and id like to let you know that i 100% agree. it seems half the crowed favours an inflationary rally and that inflation is here to stay since it always has during each of the corrective waves since the great depression. however, im fully aware of this like anyone else. this time, for me, it looks different. this collapse of the financial system is more than 10x worse than the S&L collapse and does not mimic the 1982 or 1987 collapse. this has incredible deflationary strength and momentum. the momentum towards deflation is strong on so many fronts that it can’t be ignored. the idea that you can print your way out of asset deflation may work in a milder pullback. however, this pullback on all fronts is intense. this is not a correction of a bull market like the past. this is an economic implosion on a world wide front. this also makes clear the productivity gains. productivity gains in the modern world are also detrimental to the economy in the near term. this poses another crimp into the inflationary argument. less people chasing more goods = deflation. printing money that no one wants to borrow as households deleverage will do nothing. this is my opinion and it is the only argument that makes sense to me. im in your camp Mohan. half in one camp and half in another should make for interesting trading quarter. im thinking the market hits new lows by May.
One word: stag-deflation
As opposed to: stagflation
Appreciate your answers Mohan.
Won’t devaluation of the dollar bring about inflation instead of the FED having to print money.
. Yes, things may get out of hand as you say, but he has shown some crafty tricks to buy time until now.
Plus this is a multiplier unlike printing which is additive. I am sure bernanke is aware of this and this is what he will do IMO.
The FED can do this secretly or even incite other central banks to do it (if they are not already doing it). This will inflate prices of goods which are imported by the US (not RE, not services) but basic commodities. While I agree with you on many counts, I will give Bernanke more credit. He is a professor for heaven’s sake
The money parked in treasuries needs a different place to hide now. I trust bernanke to create another avenue very soon. Probably mr. O can help with infrastructure and alternative energy.
December 21st, 2008 at 7:46 pm
you can see they are making a huge effort to smoke people out of treasuries… is it working? hell no. and every country in the world is trying to devalue thier currency before the depression hits. why would we think the US will win this battle? every central bank is in panic mode. look at what Japan just did tonight. first it was the race to ZERO and the US won that. and now its the race to devalue currency through monetary easing… good god… this is going to get out of control. who will win this painful battle? nobody. everybody is screwed and at some point they will have to agree to something else other than war. we all hope.
December 21st, 2008 at 8:22 pm
The FED and treasury have way too many weapons. The LT treasuries are close to a top.
The treasury has the “real bazooka” in devaluing the dollar. It can buy foreign debt. I am not debating who will get screwed etc. The flood out of treasury will ensue. I am “looking forward” to this happening. I am primarily a chartist and not a fundamental macro guy.
Let me present one chart in my defense.
http://goldprice.org/bob/uploaded_images/BroadDollar-774367.gif
1. I can count 5 waves up and and A and a B and an ongoing C
2. I can see a HnS and we just backtested the neckline these few months.
Of course elliotician’s reserve the right to change labels anytime
December 21st, 2008 at 8:39 pm
Richard:
I am in your and Mohan’s camp as well. It’s amazing to me the number of people who still think this is just “another” recession that will be worked out relatively quickly, say within a few years. There HAS BEEN massive destruction of wealth, created through leverage, and most of that has occurred among baby boomers who will soon be drawing from the social security system. Most of these people, who previously were spending like fools, will be scrimping for the rest of their lives. This prognosis assumes all is quiet on the geopolitical front. Throw in a couple wars, multiple terrorist attacks, as well as numerous natural disasters and we are really looking at a nasty situation. I can only laugh at those who say we will come out of this better than the rest of the world because we are “Americans”, apparently God’s gift to the world. That kind of arrogance is what will truly destroy the United States. The “social contract” that has bound Americans together, and created an irrational respect for and subservience to the federal government, has been immensely damaged by the “crafty” Ben Bernanke, the fool Hank Paulson, and the narcissistic retard Georgie boy Bush. The actions taken to bail out the rich and connected at the expense of the average citizen has created a slow burning rage among many in this country. The people being bailed out are the same people who conspired to outsource American jobs, or insource through illegal immigration, in order to put money in their own pockets. I do not believe the early thirties are a good analogy for the current situation. The situations in Czarist Russia during the period of 1916-1920, or, the situation in Weimar Germany circa 1928-1930 are much more comparable.
December 21st, 2008 at 8:49 pm
I don’t think I ever said, the problems will go away if inflation comes in. We can surely be in a recession even if there is inflation.
Richard, There will be winners. It is a game of Jenga.
Mav,
A lot of people give a lot of credibility and credit (no pun intended) to Fed and the tools in their arsenal. To me the Fed itself is a big tool. The Alan Greenspan’s Fed, in which Bernanke is a part of, didn’t see this OBVIOUS thing coming. People who believe that Bernanke studied great depression and hence he can prevent one might as well be better of believing Santa. If he really studied GD, he should have prevented it because, for many who have half-knowledge of GD this is all too familiar. Bernanke should have raised hell to raise interest rates in 2003 and prevented this. Armed only with publicly available data, if I was smart enough to short home builders in 2005 and make a profit, I am sure Bernanke should have known more. He has access to more data. He didn’t act then. He is reacting now.
IMHO Greenspan and Bernake will go down in history as the pair that ruined America. BTW, My animosity for Greenspan’s reckless policies is not new. It is more than 10 years old. When I was a regular participant on Silicon Investor, I started this thread nearly 10 years ago.
http://siliconinvestor.advfn.com/subject.aspx?subjectid=24815
Yes, my handle on SI is Cynic2005. Since that time my opinion about Greenspan has changed only for the worse. Now I added Bernanke to the list.
just recieved an email from one of my suppliers in San Diego. they have went from a staff of 26 to just him. he knows of a home containing some 20 odd 20-25 year olds living together. six of them from one Hotel that laid them off and they are unable to find work. they were all living paycheck to paycheck. things were so falesly good that many of the minions believed that it would last forever. if they have no savings now and no job how are they going to make it and grow this economy again? 30 to a house? dont know how many of you live in California but his opinion from San Diego is that he will continue trying to keep things going in their warehouse. but his future thinking is scarier than mine. mad max he mentions LOL. moving to Montana. but who knows… i dont live in California so i dont see what has passed so far. maybe he is right. one thing im certain of. his feelings dont show up in government statistics or news spin. this does not feel like a recession to me.
Richard, I’m California born, raised and a coastal resident. My undergrad was from SDSU. Things aren’t looking so good in Cali but don’t judge it by the 20-something because all my buddies and I cared about in San Diego while in our early 20s was surfing, beer and girls. San Diego could quite possibly be the best place on Earth and a bunch of 20 year-olds living in one pad is no big deal. Chicks dug that.
Separately, CA is playing it smart. Just scalped 3B from infrastructure budget. Look for CA to get the biggest Obama handout next year (to create jobs!)
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