2019 is shaping up to be a complex year for financial markets. As I’m preparing my 2019 Market Outlook I’m reviewing the state of various technical drivers before forming conclusions. I’ve started this process with 2018 Market Lessons and Yearly Candles. In this report I’m reviewing the state of larger long term market trends.
While most headlines appear to be focused on percentage point declines in markets the Q4 2018 correction appears to have inflicted massive technical damage to long term trends in many cases shattering them. However there is room for a variant interpretation as well and I’ll highlight these aspects as well.
Let’s start with the big picture and it looks as ugly as ugly can be:
$WLSH vs $BKX:
What we can observe here is a new high on a negative monthly RSI divergence and a subsequent trend line break with a structure overtly similar to the 2007 topping pattern.
As I outlined in Yearly Candles we have the added confluent aspect of an outside yearly reversal candle on $BKX:
This combination simply has to be concerning to everyone. It strongly suggests that the bull market trend is broken and rallies have to be sold.
And these charts don’t exist in isolation. We can observe such trend breaks on numerous charts:
$VTI, the all market ETF:
With $RUT we can also observe the break above its long term trend in its underlying volatility index suggesting a long term change in the volatility structure of markets.
We can observe such trend breaks also in individual stocks, take $GS as an example:
Ugly doesn’t even begin to describe it.
And as history so apply demonstrates, long term trend breaks can be disastrous to markets:
But it’s not only a US phenomenon, these trend breaks apply to global markets as well.
$DJW, the Dow Jones Global Index:
On the latter chart I’ve added some basic fib levels to demonstrate the potential extent of corrective zones if a global bear market were to unfold.
The straightforward conclusion from all this may be that the bull market is over and markets are destined for a global bear market. It’s clearly a possible outcome here and everyone should be aware of this.
However, in the search for relevance and in spirit of keeping an open mind I also want to offer an alternate perspective.
Firstly note the reversal in yields in 2018 was no technical accident. Note how cleanly and precisely $TLT cued off of its support trend line:
This trend chart is not broken and it fits perfectly in concert with the larger picture chart of $TNX versus $SPX I’ve been pointing to for a long time:
Note here as well how $VIX ended the year rejecting again at its upper trend line. This larger $VIX channel also still remains intact.
Bond trends remain unbroken and consistent.
And now for the curveball.
Note all the charts I’ve been showing are log charts and they show a consistent picture with historical bull market breakdowns.
Broken right? Now look at it in linear form:
Cute as in linear form the trend remains unbroken.
And for giggles, here’s the $SPX trend in linear form as well:
Not so broken all of a sudden is it?
So the plot for 2019 thickens and perhaps is not so obvious.
I’ll throw in one more chart for consideration the equal weight $XVG:
It shows a hopelessly broken trend and a break below the 2007 and 2015 highs. Technically speaking that’s a total disaster. Yet it also shows vast oversold readings. Past lows of significance have printed positive divergences, so far we don’t have a positive divergence, but it is vastly oversold at this stage.
Bottomline: Markets are at high technical risk of a devastating global bear market to unfold and bull market trends appear shattered on log charts. However some linear charts leave room open for the possibility that trends are not broken yet. While I’ve not addressed signal charts specifically in this post, $XVG highlights that markets remain oversold at this stage leaving room for significant rallies to emerge.
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Categories: Market Analysis
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