WHERE ARE WE NOW? A TECHNICAL LOOK

Markets have continued to trade in a range over the last few months and deciphering the moves doesn’t appear to be getting any easier as the fundamentals become even more confusing.  One of the few strategies that has worked in a range-bound market has been charting (read more on technical analysis & charting here).  Let’s take a look at a few important charts.

Few markets have served as a better leading indicator than China’s Shanghai index.  China led us out of the recession and markets have traded sideways since the Shanghai peaked last summer.  Since then, the Chinese equity market has slowly unraveled piece by piece.  China led the equity markets lower in the summer of 2008 before the bear market struck and bottomed several month in advance of the S&P 500.  At the time we said:

“China led us into this recession and it’s likely that China will lead us out.  And after a 70%+ decline, China’s not looking like a bad long-term bet to me.”

After a 50% rally the risk reward is not nearly as enticing.  The Shanghai only recently breached its 200DMA on the downside for the first time since it did so two years ago.  Investors would be wise to take note.

Dr. Copper is also showing its first signs of weakness since the bull market stared last March.  Dr. Copper isn’t in bear market territory just yet, but cracks are forming in the foundation for the first time in years.

The biggest risk to the equity markets in recent weeks has been the rally in the dollar.  The dollar remains firmly in bull territory and with problems in the Euro unfolding the dollar remains the best house in a bad neighborhood among the big three currencies.

No indicator has displayed the bi-polar market better than the VIX.  Over the last month the VIX has spiked over 40% on two different occasions spanning just 3 days.   Each time, however, the equity market has slowly crawled back as investors shift from bullish to ultra bearish in no time.  This has been one of the primary characteristics of the bull market since it began last March.  Thus far, the trend is well intact.  As the VIX sinks lower, however and investors become increasingly confident in the uptrend, the likelihood of sharp movements to the downside become more and more likely.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Nice one TPC

    Thanks for soo much valuable Information

    Julius

    P.S.: Are u actually planning to open up a Hedge Fund anytime soon?

  2. interesting charts/thoughts mr tpc

    in addition to TA and FA, there is GA….gut analysis. i know it does not sound very rational, but i often listen to my gut to help me react to the inklings of TA and FA…the last time i did that was getting out of the market when obama announced the volker rule…i got back in when my mind told me the volker rule would likely not get enacted in a way that would seriously harm the banks (in this market environment, i am overweight financials when i am in the market), but my gut saved me some coin over a couple of weeks in this example, so i always try to be sensitive to GA…