ULTRA SHORT-TERM CLIMAXES ATTRACT ATTENTION
By Carl Swenling, Decision Point
On Thursday the S&P 500 broke down from a triangle formation, which is a kind of continuation pattern. Continuation patterns are so named because, when the pattern ends, prices are normally expected to continue in the direction they were trending before the continuation pattern (consolidation) began. In this case, the breakdown was not what was expected, and puts a bearish shade on a picture that been bullish since the October low.
A positive aspect to the price breakdown is that a number of ultra-short-term indicators hit climactic oversold readings the same day. On the chart below we can see how these oversold spikes generally coincide with the start of rallies of at least short-term duration.
Climaxes are a sign of either initiation or exhaustion. An initiation climax signals that price will begin moving in the direction of the climax, while an exhaustion climax occurs at the end of a move. Immediately following a climax, prices can chop around for a day or two before the followthrough begins.
The question, of course, is what kind of initiation is this one? With an intermediate-term buy signal in effect, we look for a bullish interpretation, which would be that the breakdown was actually a shakeout, intended to turn people bearish just ahead of a rally. Unfortunately, we are still on a long-term sell signal, which means things could be about to get nasty again.
Another negative is that intermediate-term indicators (see chart below) are still overbought and need to move to at least the neutral zone. As you can see on the chart, this can happen without accompanying price deterioration about half the time.
Bottom Line: The market just failed a test by breaking down out of the triangle formation, but the technical damage is not serious, and a decline to the 1175 area to clear intermediate-term overbought conditions could be absorbed without major technical damage being done. On the other hand, if the ultra-short-term oversold spikes have produced sufficient internal compression, yesterday’s breakdown could prove to be the final shakeout preceeding a new rally. In any case I view the recent decline as a correction within the rally that began in October.
“On Thursday the S&P 500 broke down from a triangle formation, which is a kind of continuation pattern. Continuation patterns are so named because, when the pattern ends, prices are normally expected to continue in the direction they were trending before the continuation pattern (consolidation) began. In this case, the breakdown was not what was expected, and puts a bearish shade on a picture that been bullish since the October low.”
Well, this hypothesis is generally correct — assuming of course that what you are describing is indeed a triangle. Whatever criticisms some people have of Elliott Wave Theory, one of the positive things about the method is that it has specific rules on what comprises a triangle — a five legged construct that has to incorporate certain Fibonacci ratios. All too often, as in this one, lines are drawn to outline a price convergence — and voila! you have a triangle.
If I may say so, since we are discussing technical analysis anyway, what the author should be looking for at this point is a “flag” structure — an-honest-to-goodness consolidation pattern. If it is indeed a flag case, then support should appear at circa 1200 — a classic 38.0%-40% retracement of the previous rally (1074 – 1370). The rally resumes from there — also a classic 3rd wave in the Elliott Wave construct.
Traditional technical analysis states that a triangle is a consolidation point with a likely break out in the direction of the trend. As the price action moves toward the apex the volume should decrease. The breakout should be the 5th move and should be marked by a spike in volume. This triangle failed to confirm the trend.
With all due respect to the Elliot waive theory traditional technical analysis has nothing to do with fibnnaci numbers. I do not see where the author is interpreting through the prism of the Elliot waive theory.
Elliot waves? Fibonacci? Triangles? Flags? This appears to me to be a severe case of over-analysis of a limited data set.
Maybe we should be studying the alignment of the planets or the entrails of birds instead.
OK, technical analysis may be a valuable timing tool, but I doubt that it will accurately predict the next earthquake in Europe, and the ensuing tsunami that will likely strike Wall Street.
The American stock exchange is overvalued, largely because of a dearth of better investments. The American businesses and banks on the exchange have significant exposure to a looming financial crisis in Europe. The ability of the Euro politicians and financiers to extend and pretend is quite remarkable, but when the earthquake arrives it will be swift and sudden.
Call it a triangle, call it a flag, calculate Fibonaccis and waves and argue about it all you want. Just don’t get caught out in the cold when the bank doors slam shut.
In the age of Internet news, in which we quickly move to “newer news”, the European Debt Crisis (yes, capitalized) seems to have lost center stage despite the significant drop in equity markets last week which no doubt was Europe-induced.
IMHO, if you think the EDC is passé you must think again! Things are getting WORSE, Not better. The following article is much better than its title would suggest:
http://www.spiegel.de/international/europe/0,1518,798695,00.html
The european leaders’ “smoke and mirrors” tactics no longer work. The market has finally realized they are a bunch of liars that don’t keep their promises:
…Broken Promises
Back in March, European leaders promised that all investments in Greek government bonds would be guaranteed until 2013. But, in July, they went ahead and negotiated the involvement of private investors in a Greek debt restructuring. The economic situation in the country had worsened, and the political mood in Germany had shifted. At the time, the European Central Bank (ECB) urged caution. It argued that once you go down that road, you make investors nervous. As a compromise, euro-zone leaders agreed on the following formula: The terms of the participation of private investors in a so-called debt “haircut” would not be renegotiated, and it would certainly not be extended to other states.
In the following weeks, exactly what the ECB had feared happened. The interest rates on 10-year Italian bonds rose to 5 percent. And there was worse to come. In July, European leaders broke their promises from March. In October, they broke their promises from July. The participation of private investors would now be much higher, they decided.
Following that summit, investors came to the logical conclusion that politicians have basically been lying at euro summits. They surmised that, if the economic situation in Greece and the political mood in Germany changed, then the owners of Portuguese and Italian sovereign bonds would also be asked to contribute. In the meantime, even normal individuals are now withdrawing their savings from banks across southern Europe…
They’ve become paralyzed, next the markets panic, they will try to improvise but it may be too late.
Go to http://www.greekcrisis.net for the comprehensive current info on the EDC. The site used to focus on Greece but “we are all Greeks now” so they have shifted their focus. Talk about a domino effect:-)
…next [time] the market panics…
Cullen have you done empirical research of country debt levels versus investor confidence or social and political stability?
What do you think of Kyle Bass’ asymmetric hedge on Japan? — I would really like to know what MMT thinks of this.
http://www.youtube.com/watch?v=VBWiQlS5Qg0 — BBC Interview with Kyle Bass
http://www.scribd.com/doc/48887451/Kyle-Bass-Feb-14 – Kyle Bass on ZIRP, Japan
You have wrote about how the hyperinflation in Myanmar Republic and Zimbabwe are not the same as the United States. You talk about a complete rejection of the currency which usually comes from social and political unrest and the US has not seen that yet and therefore is not seeing hyperinflation.
I would like to hear your answer to my conclusion below.
Please bear with me as I outline my reasoning. It goes something like this:
1. Free trade has opened boarders (GATT WTO)
2. Technological advancements (internet, centralized databases, scalable machinery) have allowed corporations to open shop around the world and still be controlled by a central HQ effectively removing a great deal of patriotic ties (ex. GM US is now GM world)
3. Technology has also allowed for less people to be employed and create much larger scale with a smaller number of people employed and have kept a vast majority of people working in jobs where they are over qualified for and underpaid for their qualifications (excess supply of labor)
4. Technology and free trade has allowed for international companies to give jobs to the developing countries and sell the product at the same price in the developed countries. This is transferring the wealth from the rich to the poor in an extreme fashion
This all creates what is now the world of ridiculously increased competition and cooperative competition.
Now in the United States, the largest developed nation in the world and arguable the best worst large debtor in the world (EU is in deep trouble because of no central taxing authority … [insert the majority of your posts on EU], Japan is facing an extremely dire situation [Kyle Bass arguments, over all homogeneous aging population, etc..]) so it is currently in a position where it gets the long end of the stick and this can clearly be seen by the flight to quality in the debt markets. To get to my final point I would like to state these:
1. US unemployment is still very high after $3 trillion dollars have been added to the Fed Balance Sheet
2. A vast number of people are underwater in their home equity
3. Debtor nations are going through home, bank and sovereign balance sheet deleveraging. This slows down the economy and has not set a precedent for more jobs
4. US has better demographics than say Japan and its cultural fortitude has entrepreneurship embedded in it
5. The aging population will require health benefits and pensions
Ok so my question is. With these facts where corporations are not hiring people, the demographics are still not fantastic, people are underwater in their homes, and an aging population is going to need more help by the social system. How can you say that the stage is not being set for the United States to enter into a period of more social unrest and quite possibly a rejection of its currency?
1987 type event looming
“Climaxes are a sign of either initiation or exhaustion”
i love technicals