Market Analysis

Weekend Charts: Cutting Through the Fog

Fog2015 has started off with plenty of drama and wild price action: Burning oil, melting copper, and a sudden crash in Swiss stocks all have contributed to a sudden explosion in volatility that has whipsawed traders in multiple directions multiple times a day in all asset classes. In short: A great trading environment if you can keep emotions out, focus on levels and play tight with stops.

No doubt we are finding ourselves in a highly complex environment and staying focused may be difficult for many by all the conflicting information that is bombarding traders and investors alike. Friday’s 40+ handle bounce off the lows provided much relief to equity markets. Many expected a breakdown and the risk of lower prices was certainly there. After all BK bought puts, Dennis went short, and Ralph saw the heads & shoulders (followers of my twitter stream know I like to poke fun at sentiment):

But that’s all theater, let’s review the facts and try to cut through the fog:

Firstly, one must acknowledge that the SNB inflicted a lot of damage with their sudden decision to remove their peg from the Euro. Lots of people got hurt and entire companies and myriad of individuals either went bust or suffered significant financial damage. The Swiss stock market traversed an entire year of price range in one single day:


Outside year in 1 day anyone? Add to the fact that plenty of Polish mortgages were apparently pegged to a perceived stable Swiss frank and the sudden appreciation in the Swiss currency raises the specter of systemic risk in at least portions of the global capital flows. More to come I’m sure.

Central bank mayhem at its worst. But it’s not all bad is it? After all the Swiss decision was likely rooted in a cause célèbre: The imminent ECB decision on QE. And little noticed on Friday seemed to be the #DAX breaking out to new all time highs in likely anticipation of that decision:


That’s a hell of a move in its own right. Now the obvious pattern that emerges there is a potential megaphone pattern, but if you look closely inside you may also see a rather large inverse heads & shoulders pattern that points toward the 12,000 area. Part of this move can be argued is due to the massive collapse in the Euro:


Markets have a lot to prove here and the #DAX may as well reverse and show a fake break-out. But for now it has broken out and one must acknowledge its potentially massively bullish implications.

Despite all the drama of the past two weeks several key items stick out:

1. Per the above markets had all the excuses in the world to break lower than a basic 5% correction, but so far have failed to do so.

2. The 2000 analog we’ve been tracking still calls for a massive blow-off topping move in the spring time and plenty of signs still point to such a possibility.

Let me walk you some charts:

The $ES touched its 200MA Friday and bounced:


The $VIX failed its breakout and closed back below the upper trend line:


The $DJIA bounced off of a key trend line as well and shows an intact pattern:


The monthly $SPX chart shows its usual bounce off of the monthly 8 MA:


The monthly MACD cross keeps teasing, but each time it looks to cross over it gets magical saved. It simply hasn’t happened yet on a monthly closing basis. On a weekly chart so far this correction simply looks like a standard pierce of the weekly Bollinger band and bounce within a well established channel pattern:


Note the newly formed ascending trend line. As long as it holds it points towards an interjection with the upper trend line to come. And note that this interjection would like occur in the spring matching the time frame of the 2000 analog perfectly. A similar trend line pattern can be found across multiple indexes:







I could go on, but you get my drift: Different slopes for different folks, but all with the same message: Very sizable upside potential into the spring. This week bears had a great opportunity to break the trend lines, but didn’t. The $RUT looked to break down as well, but then Friday saved it all again:


To be sure I’m not ringing the all clear on stocks here at all, but I’m pointing out that the charts tell us nothing has broken yet. After all the current weakness can be explained by one common thread of all recent declines: A short term decline in the M1 money supply:


So assuming M1 supply rises again stocks can continue their upward slope as well. TINA (there is no alternative) still reigns supreme after all and one could argue we have just witnessed some solid amount of fear as evidenced by a renewed panic move into bonds that is reminiscent of past patterns signaling a soon to come potential reversal:


Other signs supportive of a coming move higher: The percent of stocks above their 200MA bottomed in the 60s this week a level commensurate with recent bottoms as well (including February a year ago):

200 AR

The exception of course being October last year and this chart still points to a negative divergence vis a vis new highs.

Curiously high/lows barely ever went negative this month despite all the drama and Thursday’s down day was accompanied by a tick higher in this indicator:


So where does this leave us? Basically both camps have to still prove their case here. One chart that highlights this point is the value line geometric index which points to a market never having broken out to new highs:


The bearish view: Markets continue to fail to break out above resistance and to new highs.

The bullish view: It hasn’t rejected as in the past and is basing, so watch out for a break-out.

What does this all imply from a trading perspective? Stay flexible and disciplined and you can do really well. Know where you are wrong, know when to stay in, and know when to scale out and lock in profits and have a trade plan to execute on. As an example, while we go stopped overnight into Friday we positioned long into the weakness with a technical view and targets in mind and were nicely rewarded:

And this is how the chart closed the day on Friday:

SPX 15

Bottom line: We can’t control the environment and targets are not guarantees, but analyzing structures helps us assess risk/reward for entries/exits. And so far 2015 has been a superbly rewarding trading environment.

For more information about our trade philosophy or on how to become a member please visit the About and Membership pages.

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