LET’S GET TECHNICAL – EXPECTING AN UPSIDE BREAKOUT
The following is the the technical take on the market from Decision Point:
On Thanksgiving Day Dubai announced that it would be delaying loan payments by six months. This resulted in a global selloff, in which the U.S. markets participated on the following day. There was virtually no follow through selling this week. Looking at the S&P 500 chart below, you can see that the Dubai selloff is practically invisible within the context of the trading range of the last several weeks.
In fact, the market is consolidating during a time when I had expected it to be declining into the 20-Week Cycle low. Because of this I have had to reconsider my cycle assessment: It appears that the 20-Week Cycle low occurred on November 1, about three weeks ahead of schedule. Early or late arrival is a frequent occurrence, but not something we can know until after the fact. All we can do is adjust accordingly. At this point, I think a new 20-Week Cycle began on November 1. The next major cycle-related correction low is projected for April 10, 2010 when the 9-Month Cycle is due to bottom.
Let’s look at the chart again. What I see is a flag pole (the rally from the November low) and flag (the recent three-week consolidation). The technical expectation from this formation is an upside breakout with an initial target of about 1180. We are in a bull market with the market behaving extremely well, so I have high confidence in this outlook. If prices drop below the bottom of the flag, breakout expectations would be negated.
Next is a monthly chart of the S&P 500, and it contains some very bullish evidence. The monthly PMO (Price Momentum Oscillator) is rising off a very oversold reading (lowest since 1932), and it has crossed up through its 10-month moving average. There are only four other deeply oversold PMO bottoms since 1929, and all were associated with new bull markets. Four data points in 90 years is a thoroughly inadequate statistical base from which to draw conclusions, but, understanding how the PMO works, I think the bull market is likely to continue for at least a year and could easily challenge previous all-time highs. Be advised, however, the positive long-term picture does not eliminate the possibility of substantial corrections along the way, but a smoothly rising monthly PMO presents a solidly positive long-term technical picture.
Bottom Line: Technically, the market is showing solid strength, but the bull market is running strictly on speculation and emotion, and there is virtually no fundamental support under the market. The Dubai event is a good example of the kind of thing that has the potential to start an avalanche of selling. There are probably hundreds of them waiting in the bushes. Taken one at a time, they may only cause a momentary ripple. If too many pop out at one time, it could end in disaster.
Source: Decision Point
If you stand back too far from this analysis you realize how absurd the rally from July has been (I assume the March low was a bit of an overreaction). It was clear in July, with the S&P at 880, that the market was valued a little high (800 is closer to fair value), and most stocks offered little in the way of a margin of safety (or so it erroneously seemed). At that point that real gambling fever took hold (recall AIG’s run from 9 to 50). The Fed did weekly POMO injections, Cash for Clunkers hit, banks reduced their loan loss amounts (to show a profit, which was entirely fictional), and the whole world played along with the “reflation” trade (look at FCX’s run from 45-85, and look how historically high the price of copper is–my view: it should be ~100). So where does that leave us now since the analysis above basically says the market will likely “leak” up but expect a crash at any moment? Is this a time to go all in and basically watch your screen all day? Or should we assume that the government’s around the world will continue to catch every dropped ball and forward the bill to taxpayers?
The underlying fundamentals don’t support the market. Even the administration’s big supporter Paul Krugman says the double dip risk is rising. Trim tabs interpretation of the labor data is worth reading.
http://www.businessinsider.com/trimtabs-the-real-job-loss-number-was-255000-2009-12
When the fundamentals and technicals disagree, go with the fundamentals or trade with a twitchy finger.
Philip
Don’t listen what they say, watch what they do. influential people predicting 2nd dip recession is precisely reason people have to long. Because they are telling you how future plays out, but they are telling you what policy they recommend.
Prechter said he will admit wrong if everything makes new high. The charts just show we are tipping toward GLOBAL hyperinflation every day. It is political decision, by GXX, until the policy is revoked, the inflation zero sum game to looting small guys is alive and well. And, It is easy to predict it will take blood and lives to end this madness.
There will be extraodinary opportunity to invest in stocks and RE as hyperinflation takes to extreme, as Marc Faber described as “inflation paradox” but for now, you can’t have enough gold.
Perseving wealth, is still number one priority.
If we break higher from here I would have to believe it’s on borrowed time.
Steve Keen (Dec 1st):
“That huge government stimulus has attenuated the severity of the crisis, and led to positive growth figures in many countries…
But it still has not addressed the cause of the crisis–the excessive level of private debt, and the transition from a period of decades in which rising debt fuelled aggregate demand, to one in which the private sector’s attempts to reduce debt will subtract from aggregate demand.
For that reason, I do not share the belief that the GFC is behind us: while the level of private debt remains as gargantuan as it is today, the global economy remains financially fragile, and a return to “growth as usual” is highly unlikely, since that growth will no longer be propelled by rising levels of private debt.”
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The least politically painful way would be to cause inflation–by for example increasing money wages–and let that devalue the debts, after we had also reformed the financial system to make it virtually impossible to profit by speculating on asset prices.
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In practice, I expect effective political paralysis over the issue and a drawn out, case by case reduction of debt via the traditional mechanisms of bankruptcy and the like, with some case by case debt reductions as occurred in the Great Depression.
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I expect instead deflation–low to negative growth with, for a reasonable period, both falling consumer and asset prices. This is what happened during the Great Depression. I don’t expect inflation for reasons that I outline in the Roving Cavailiers of Credit post”
http://www.debtdeflation.com/blogs/2009/12/01/debtwatch-no-41-december-2009-4-years-of-calling-the-gfc/