Looking at the big picture also allows us to put things into context. Remember, there are trillions of dollars in the market from a variety of investors in different stages of their lives. If you are 65 years old having put the vast majority of your nest egg into the market during the final 8 years of your working life, now facing retirement with a home that has lost 30%-50% of its value, do you even have the luxury of staying in the market? What about the state of the global economy as a whole? Are we truly on to a new cycle of economic expansionism? If so, what are the drivers? How do they compare to past cycles? Are conditions ripe today?
Anyway, let's look at the big picture. This is going to take a while (IN FACT THERE WILL BE A SERIES OF POSTS FOR EACH TIME PERIOD AND EACH POST WILL BE REVISED SEVERAL TIMES) so strap yourself in and open up the first chart which is the 10year monthly. I advise opening in a separate window.
I first want to orient you to the primary chart components - and I am only concerned with price action at this stage. Here are the key chart features:
1. This is a monthly LINE chart for the last ten years
2. The 20, 50, and 200 period moving averages are labeled and lightly fatter than the other lines to allow for easy identification
3. I have included bollinger bands in grey. These bands are based on 6 periods - not 5 periods. I did this because we are now 6 months into this rally leg and I think we are either consolidating or forming a local top and I wanted to see how this thesis jives historically.
4. I have included a 6p MA which is essentially the center line of the bollinger bands. Remember, price action will tend towards upper and lower bands crossing OR bouncing off the cetner line.
5. Finally, I have added a single fib grid for the CLOSING price action and the CENTER fib line.
Take a moment to organize your own thoughts on this graph. I have four main observations to share.
1. An argument can be made that the market has formed a broad double top and could very well be headed for lower lows. Look at the price line. The first top was made in March of 2000 and the second top was made in October of 2008. There is no denying the double top claim, however some may be skeptical about the possibility of a lower low. I mean, who is to say that we are just not range bound? Well, perhaps we are - but I think we have to consider the fact that the low on the price line of March 2009 was substantially lower than the low of the price line in October 2002. At a high level, the market reached euphoric levels in 2000, it suffered from a major Delcine in confidence, recovered to a similar level of euphoria and then lost an even greater level of confidence. Considering all that we know today, are world conditions (economic, political, social, etc.) ripe for an extended bull run? Or, are we off to a premature start? I think this question is being contemplated by the markets right now as we approach the major retracements of the last leg down.
2. The moving averages are important as they are the quickest way to digest the trend. It is fascinating to note that the slowest average on our chart (200 period) is actually rising. This tells us that at the highest level, the market is actually rising. This can be explained by the fact that most downward action happens quickly and as a result, has less of an impact on the average. Uptrend happen over longer periods of time. What is more fascinating, is that both the 20 and 50 period MAs are headed down. That is the prevailing trend. In fact, the rate of descent on the 20p MA is sill pretty scary and as we have seen in the last day, it had a substantial downward impact on price (casuing 40 point drop). It will also cross DOWN through the 200p MA soon. This is a bearish signal. I will point out that it has not happened in the last 25 years. This event could very well cause the start of a full retracement of the rally.
Having said that, we do have some bullish factors as well. First, the price line has crossed UP through the 200p MA and is approaching the 20p MA. An argument can be made that the price action is reverting and should extend positively as far as it did negatively. That would of course require a break above the 20p MA and the 50p MA. That implies at least a 200 pont move from here. Although that may not feel reasonable, there is a technical case for the action.
3. The price action has entered the very first trouble zone since the rally started in March. Open the following chart which magnifies the current price action with respect to key levels:
The price action is in blue and it has been rising - almost vertically - since the bottom in March. There was very little in its way. In fact, price action suddenly reversed after dramatically sliding down the bottom BB. Since then there have been only two tests. The first is the center line of the BB. This is to be expected and once we cross through that line, confidence was gained. Price ascended strongly and then PAUSED at a point that allowed the center BB line to bi-sect the price action off the bottom. You can almost feel the caution. After a short period of consolidation, and a healthy diet of green shoots, the price action made a direct attack on the 200 p MA - crossing it nicely. But notice the slight bend of the slope. We see price action losing some of the vertical strength exhibited through-out the earlier months. Reason? The Trouble Zone!
Notice how the terrain suddenly changes to include many levels of resistance and converging lines. Price action now has to navigate a series of obstacles, including:
i) The 38% retracement of the CLOSING PRICE LINE. This is huge in that it will either open or reject a run at the 50% line. A rejection of 50% is a very, very bearish signal.
ii) As we have already seen, the 20p MA is a powerful downward force on price action. Look at the angle at which it is descending. The slopes of price action and moving averages really have to cooperate to promote a rally. They seem to oppose each other and the head banging has begun. Compare the current rejection to the seemingly effortless peircing of the 200p MA. Now note the slopes of the MAs. The 200p MA was moving with price and much flatter - more vulnerable to an upward piercing.
iii) For now, let's skip the 38% retracement of the center BB line. Yes, you can apply technical analysis to moving averages. In fact, volatile markets often dictate such analysis. Regardless, the intersection of price action with this retracement level is not as important as the intersection of this level with the actual 6p MA. That is not in play yet - so move on to the next level!
iv. The next challenge is the top BB. Do you notice how flat it got in the last month? Generally speaking, if price action pierces a flat band, it will generally cause a strong reversal with price action regressing to either the middle BB line or the lower BB.
v. The 50% retracement line. This is where many trends are continued or cancelled. Though I often speak of 5 wave EWTs - there is a very popular belief that major rally legs retrace at 50% levels. So, if we do reach the 50% retracement level on the closing price line, the market will have a STRONG tendency to continue the prior trend - which happens to be down. (Sorry my bull friends but I do not make the rules!). The proximity of the 50% retracement level to the top of a flat BB strongly supports this possibility.
vi. Let's also skip the 50% retracement of the center BB line for now - however let's recognize that it does represent additional resistance.
4. Considering we have a total of six (6) points of resistance, four of which are often associated with reversals. It is safe to say that we are in the TROUBLE ZONE. If we emerge on top - no stopping this train until the next test at 1252 (which happens to touch the 50p MA). If we don't get through, we may very well get the retest of the bottom. Assuming we are near the closing level for the month. The following retracement chart will help guage the pullback levels:
Love to hear comments!
6 comments:
Thoughtful, well eluciated & much appreciated analysis. Interesting concepts, esp.: lower low after 2nd peak and "trouble zone" concerns of 20p MA crossing down through the 200pMA, along with Bollinger band resistance to price.
David , I have read your analysis ( twice ) I am still working on taking it all in :)
Hey Attitude and Payline,
Thanks - I just started the weekly - and will try to update with observations later this evening.
I have company coming over in a few minutes - however I hope the wine will not impair my judgements!
I dunno. I do think that we are close to a turning point. Rather than TA, we have a couple of big dynamics to think about. Slow economic growth and the impact on profits, and future credit trends. Eventually these should drag down the market. Near term, though, we do have a relatively manipulated market, do we not? I think that the PTBs would love to use short covering to push up the market or at least keep it up as much as possible.
Can this manipulation keep the market elevated, and can we determine some sort of pattern associated with this manipulation? Or, is the trend about to change, as many are thinking right now? I guess we will see.
Continuing my train of thought (I had to walk the dogs), obviously one can only go so far with manipulation, but have we reached the turning point? I dunno, but where we are right now I have concerns that the PTBs are buying the shares that shorts are selling in the 1040s, and we'll have another jamming session higher. Possibly all we need is one jamming session above 1040 for some of the idiots out there to think that 1040 is strong support or somesuch.
I dunno, but I do think that the fact that we got the QE termination news right after a down turn suggests some sort of jam job in the near term.
As I said before, we will get the significant downturn when credit markets start to implode again. Until then the upside is no doubt limited, but I don't think a true crash will come. (We'll see. I always get jammed up at turning points.) I guess the question is whether the PTBs are OK with a downturn if they are positioned for it. etc.
Hey KPH,
The manipulation topic is a tough one - we all know it exists and we know it is performed with one fist of noble intervention and another two fists of greed. There are limits to how much and long manipulation can take place. The primary goal of manipulation is to run prices in a direction and change hands at the peak with the herd. The size of the herd at the time of the batton pass determines how long and high the final rally will go. I think the batton is being passed in a thin market and we are seeing weakness. If the price action fails to stabilize within a 10% drop of where we are today - I think we'll see the next step in manipulation.
I am interested in the credit market concern and how you see it affecting the market short and long term. Is the concern with private markets or our government? It is a good subject and a huge influence on fundamentals and setiment.
Cheers!
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