Market Analysis

Key Charts

We’ve just come out of a summer period where nothing seemed to matter with markets relentlessly accelerating high to suddenly everything mattering as we just saw the most aggressive correction off of all time highs in the Nasdaq since the 2000 bubble.

A lot of people have written to tweeted @ me in July and August with phrases such as “technical no longer matter”. My response: Technicals still do matter and they matter greatly and there are four charts I want to highlight that show an orchestra of relevance here everyone should pay close attention to in my view.

On Tuesday I had a chance to discuss 3 of these charts in a segment on CNBC Power Lunch. As the segment ran against the clock it was short in time, hence I want to take the opportunity to expand on context of these charts a bit here in this post.

For reference here’s the clip from Tuesday to set this up:

First off let’s recognize we just had a sizable correction off of the megaphone trend line I’ve been highlighting.

This was the original chart I outlined in Bear Capitulation and Panic Buying which pointed to upside risk and resistance:

Here’s the updated chart:

Technicals matter on the upside as well as to the downside. This resistance zone mattered big time as the throw over last week may have forced capitulation, but it was violently rejected and $ES was thrown back inside the megaphone pattern. A furious run from the March lows. Note all of these upper trend line tags have come on the heels of intervention. The January 2018 top on the heels of tax cuts, the early 2020 tag on the heels of hundreds of billions of Fed repo interventions and of course this run here on the heels of $3 trillion in Fed intervention. None came on a fundamental improvement of the economy or growth.

2019 saw flat earnings growth, 2020 is seeing negative earnings growth.

But technicals matter on the downside as well. As you can see the March lows coincided with a tag of the lower trend line and this week’s $ES lows have so far defended the rising trend line that was initial resistance in June and is for now support.

Hence the view that there was confluent support that permitted for a long bounce trade into this correction:

Yes technicals still work.

Just don’t call me a permabear:

And since technicals matter I want to highlight these other key charts.

I’ve kept harping about the value line geometric index as a measure of equal weight and it keeps screaming caution and is highly suggesting that all new highs on $SPX and $NDX were literarily driven by those key techs stocks that have jumped to historic valuations:

Even during the recent run above the June highs and to new all time highs $XVG couldn’t even get to its June highs. This is how distorted these markets have become. And note the pronounced weakening that took place way before Covid. The February readings were much lower than the 2018 readings. So small caps, banks, etc, all had shown a negatively divergent market. Unless this equation changes I still consider the broader market to show signs of a bear market rally off of the March lows and the panic buying into high cap tech stocks has provided the illusion of all being well.

And there’s one chart that support this view and that is the $VIX. In August, with $VIX trading at 22 I highlighted this compression pattern on the $VIX suggestive of another breakout coming:

And the breakout has come to fruition:

It hasn’t reached my 46 target yet, but did manage to break to 38 last week. Whether it reaches the 46 target remains to be seen, but the larger point to highlight: With trillions in interventions and new all time highs on $SPX and $NDX $VIX should’ve have been able to fill its February gap at above 17.5. It hasn’t. Why not? The $DJIA has filled its February gap, so has the $SPX and $NDX obviously. The $VIX hasn’t and that is notable. Things are not calm is the main message.

No, these high volatility readings are supportive of the bear rally argument and the consecutive pattern spikes risk the building of a much larger volatility pattern that could spike far above 46 in due time.

So the $VIX remains a key chart to watch, which brings me to the final chart I discussed in the CNBC interview, and perhaps the most important chart of all: The US dollar.

To the extent much of the rally has been dependent on a declining dollar the technical pattern above shows a recent breakout of the dollar out of a falling wedge pattern, a very clean pattern that has formed during the summer months and has come on a positive divergence.

If the current technical market bounce off of short term oversold conditions can’t force the dollar lower, but rather sees it perhaps retesting the pattern and then move on higher any bounce rally may prove short lived as a major dollar rally is probably least expected at this time as most participants see a long term declining dollar as a given with ongoing Fed intervention and are positioned as such.

Given this backdrop the confluence of historic overhead resistance that was rejected, a questionable internal picture of equal weight, a continued stubborn high volatility index and a potential bullish pattern in the dollar (not to mention valuations and forward multiples) make these 4 charts key to watch in the weeks ahead and make any rallies either of the lower high or even new high kind very questionable.

Technicals still do matter and they keep firing warning signs on a big structural level.


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Categories: Market Analysis

12 replies »

  1. Hi Sven,

    Thanks a lot for your great analysis and fabulous tweeter feed. What books do you suggest for learning more about technical analysis? I have personally read several ones such as the one by Murphy, 2000, Kaufman Short Course in Technical Trading, and Pring’s Technical Analysis. I would definitely appreciate your kind guidance in this regard.

    All the best,
    Alex

  2. Even with my limited knowledge, I continue nodding my head as I read your posts, Sven. You succeed in explaining technical analysis so that the lay person, myself, is able to grasp at least a fundamental understanding. And for that, I continue to be grateful.

  3. I have a wacky hypothesis for you: The algos are conspiring together and rolling dice to decide whether to collectively buy or sell.

    Now this could be explained by the spontaneous development of rudimentary collective consciousness by algos (very low probability, I hope) or they are weighted (by humans who made them) to watch each other and one or more of them is rolling dice.

    Why do this? Because the algos win more! They are faster and have more resources, so a bit of zigging and zagging increases their score – it’s all just a game to them.

  4. TA is not “math” as used in science or physics, based on formulas and universal constants. TA is simply a pattern that is followed by enough algorithms and human traders that it becomes somewhat self-fulfilling. Most people have a difficult following simple math, probabilities, etc. For example both Presidential candidates, whichever is elected, will be in office beyond the average male life expectancy age. People do not understand math, or they would be demanding younger candidates for the 2020 elections. Speaking of elections, it will be hard to avoid politics over the next three months if you are invested in the markets. CNBC had a survey today that showed over 50% of voters do not see either candidate as mentally fit. So we will have an elderly,
    possibly mentally unfit President, with high probability, in office by early next year? Yeah, that should help with the uncertainty and anxiety plaguing our populace today so keep working on those volatility charts Sven…

    • Yes, TA is self-fulfilling as humans look for ‘patterns’.

      However, your further comments suggest some lack of understanding of the actuarial science of life expectancy. “Average life expectancy” of a 1 year old is different from “average life expectancy” of an 78 year old. Using UK projected mortality from 2018 based population projections, a 1 year old male has an average life expectancy of 87.34 years (ie. to 88.34). A 40 year old male has life expectancy of 44.8 years (ie to 84.8). A 78 year old male has a life expectancy of 10.19 years (ie. to 88.19). Individuals may live more or less as these are average but statistically based predictions and take into account all health problems of the general population.

  5. At age 82, the fourth year of term for one canidate if elected, note that 55.447% of males in the U.S. do not reach age 82. At age 82, there is a 7.1657% of death over the next 12 months. All stats according to 2016 SSA U.S. gov stats, specifically the 2016 “Actuarial Life Table” via website. Note that Covid is not factored into such data from 2016 as 75-84 year olds have a 220x more risk of death according to latest CDC data. Plus knowing the dementia risk doubles each and every five years beyond the age of 65 (1 in 14 have dementia at age 65), and knowing that 70% of strokes occur after age 65…not sure that the life expectancy at age 82 of 7.6 years is very reassuring so keep those volatility charts flowing Sven…

    Look life happens, I’ve had two family members reach age 99, yet one member got dementia at age 68. It is not logical to have the single most important leader for the world to be 74/78 or 78/82. It creates unnecessary uncertainty for the entire human race. And at that age, why not retire or do something less demanding as the stress alone from being President is not healthy at any age, let alone upper 70’s to early 80’s…

    • Well, I’m 66 and still perfectly capable, thankfully. However, it’s clear to me that I was more capable / alert / dynamic 10 years ago than I am now so I agree with the comments saying that people over 70 years old are less suitable for jobs like POTUS. I’ve never understood the pechant for elderly leaders, I think that someone aged 30 to 45 years old is much more appropriate – I know my peak (and most other people I know) was at that age range.

      It would not be unreasonable, IMO, to limit those seeking election to congress or president to a maximum age of 65 when taking office. That said, I would be very happy to elect the Biden / Harris ticket, Kamala was my first choice, lol. A rabid monkey would be better than the present POTUS, and to those who want a Republican I’d say he’s the clearest example of a RINO there could be – and has done a fine job of destroying what was left to the GOP.

  6. With the minimum age to be President being 35 years old in America, it would be logical to make 65 the maximum age (exact center range for a 0-100 year old possible life span). As far as the economy is concerned, the best possible outcome for the election would be a split Senate/House. Both business and markets do best with the certainty of having a political system that is split and can not screw things up further as no laws change be added or changed. Personally, I believe being President should be a 6-8 year single term only, as a first term President is shackled by re-election, and in four years the only thing that gets done is a total reversal of the previous policies, then rinse and repeat when the Presidency changes sides again. Thing is most people are not very logical, else climate change would actually be on voters radar versus law-n-order and other smoke screens. Speaking of smoke screens, I’m betting climate change is moving up the voting ladder on the West Coast. Having experienced a forest fire surrounding my own home in the past with smoke infiltrating the internal spaces, it is a very disturbing experience with very little options. Keep safe America…

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