Wednesday, September 12, 2012

Two Long-Term Charts Every Investor Should See

The first bit of market-moving news is now out, as the German constitutional court ratified the European Central Bank's bond-buying program.  Bulls are hoping this will provide more liquidity to keep equities ramping higher.

The Fed announcement is pending and due out on Thursday, and I feel this ECB news largely rules out a new QE program at this time.  This Fed strikes me as very reactionary, and I think they'll be saving the QE3-bullet for a moment when the market actually needs a lift.  That moment isn't now, since the market is trading at multi-year highs; but it's highly likely that Bernanke will do some more jawboning about how "ready" the Fed is and how they're just itching for any excuse to launch QE3.  They need to keep hope alive in order for their ongoing "Virtual QE3" program to continue working.

The first chart I'd like to share is a monthly chart of the Nasdaq Composite (COMPQ).  This is the type of chart you rarely see published; most traders tend to get focused on the smaller time frames, and then end up blind-sided when the market reaches very long term resistance (or support) levels they didn't even know were there. 

I would be quite surprised if the market can sustain trade above the long-term resistance levels it's now approaching; in a moment I'll discuss some reasons why.  Needless to say: if it can, I would consider that a solid reason to shift to a more bullish footing.

The black channel is called a "base channel" in Elliott Wave terminology, and the price action within is presently viewed as an ongoing correction to the dotcom crash wave.  Most corrective ABC waves will maintain trade roughly within their base channels; a significant breakout through the channel is considered a warning that the assumed correction may instead be something more meaningful.

The top of the base channel crosses roughly 3200, and the market has thus far reached a high of 3139.  This chart suggests that caution is in order for long positions.

Next is a long-term chart of the Volatility Index (VIX).  When VIX goes up, equities generally go down; and vice versa.  I called attention to this chart on August 20, and mentioned that this signal seems to lead turns in equities by a few weeks.  The few weeks have now passed, so we should know reasonably soon if this signal means anything. 

The S&P 500 (SPX) daily chart continues to suggest that a terminal ending diagonal is the best-fit to the current pattern.  Once again, the upper black trendline is my adjustment point from bear to bull; a head-fake breakout would be reasonably normal, but sustained trade above that level would cause me to suspect the pattern is more bullish than anticipated.

The chart discusses a recently-triggered signal in the Bollinger bands, which in the past has led intermediate tops.  This historical market behavior fits the expected terminal nature of the pattern, and it's one more signal that's causing me to continue favoring a bearish intermediate outlook.

The SPX has not quite reached the 1440-1460 target zone, though it came extremely close with Monday's print high of 1438.74. If this is indeed wave 5, the chart below also suggests that it's time to stay cautious and nimble with long positions.  However, so far the bears haven't reclaimed any key support levels, and the weird overlapping structure at the beginning of the move makes it somewhat difficult to predict exactly how many fourth and fifth waves still remain left to unwind.  Inexperienced traders are not encouraged to front-run anticipated turns, as bucking the trend is always a high-risk proposition.

The three-minute SPX chart suggests a simple bullish trade trigger and probable target.  Trade beneath 1432 would cancel the target and give the short-term market a more bearish bias.

In conclusion, the long-term and intermediate-term trends are still up, so one might ask why on earth I'm favoring an intermediate bearish outlook.  Here's how I parse the evidence:
1.  The Nasdaq is near long-term resistance.
2.  The VIX is near long-term support.
3.  There are several recent signals, such as the Bollinger band breakout (discussed on the third chart), which have consistently led intermediate turns in the past. 
4.  The SPX appears to be completing a terminal pattern.
These are the types of things I look at when trying to determine the likelihood of one pattern over another; and the combined evidence suggests that a terminal pattern presently makes perfect sense here.  Are there bullish options?  Absolutely, and I'm not closed to those options (see Monday's article); one can never say for sure what the market will do, but the current evidence suggests those options are less likely.  A sustained breakout above the levels discussed would shift the odds into the bulls' favor; barring that, the evidence suggests that an intermediate turn is fairly probable. 
Once again, this does not preclude higher prices over the short-term, and indeed the short-term pattern suggests the move may have a bit farther to run.  But for longer-term traders, now is definitely an excellent time to exercise caution.  Trade safe.
Reprinted by permission; copyright 2012 Minyanville Media, Inc.

1 comment:

  1. Great post, I think that the market is telling us a lot, probably going to be a SELL the NEWS event on thursday with the QE3 announcement. The market cannot get up past those 2008 highs, and every day this week so far, there is considerable selling by the close of market (EOD) so QE 1 did not work, neither did QE2, do they expect us to think Q3 is going to make a blasted difference. 

    Happy trading. ==>