Unprintable Money

The Fed announced the start of the third wave of quantitative easing since 2008 on Thursday, much to the surprise of anyone, including myself, who thought another big round of money printing was unlikely with the SPX testing four year highs and oil testing $100 per barrel. SPX broke up on the announcement through strong pivot resistance in the 1440 area and the possible double-tops that were forming there were killed off. SPX has now taken the bullish path I was describing in my post of 19th August, which you can see here.

In terms of resistance levels above on SPX, there is some resistance at 1500, but the main target is now the 2000 tech bubble high and the July 2007 high at 1553 (the first top of the 2007 double-top), and I’m expecting that to be tested in early 2013. I’ve shown this below on a seven year reversal patterns SPX chart:

Where will this all end? Who can say? A test of strong resistance at the 2007 highs on SPX from here now looks very likely, and we’ll see how the technicals look when we get there. It’s worth adding that the only country that has tried this mix of deficit spending / stimulus and money printing / quantitative easing in the past over a long period is Japan, and there the result has been economic stagnation, a very weak stock market and the effective bankruptcy of the state. Perhaps the results will be better than that in the US. So far at least the experience on equities has been been better than the Japanese experience. Here’s a monthly log scale chart showing the Nikkei since 1980, with the bubble high there in 1990, since when the Nikkei has fallen slightly over 76%:

QE3 isn’t just good news for equities of course. On the increasing expectation of QE in recent weeks gold broke up from the descending triangle that had formed there since the 2011 high, and the pattern target there is 2050, with an 84% chance of making that target according to Bulkowski‘s pattern performance statistics. Bulkowski, the best known author on trading chart patterns, says that a descending triangle that breaks up is a very strong contender for his favorite pattern to trade. As gold is also a widely recognized alternative store of value that can’t be printed by central banks, the fundamentals there also look increasingly good compared to the increasingly debased paper currency alternatives, and I’m expecting that 2050 target to be made and exceeded:

In the short term both equities and gold look very overbought. SPX is hitting some resistance in the 1470s and gold has a strong resistance level around 1800. We may well see a significant retracement on both very soon and those would be dips well worth buying.

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Bullish Breaks

I’ve been writing about a likely test of the 1440 area pivot on the S&P 500 (SPX) for several weeks now. SPX closed at 1438 on Friday so that test is now being made. I was writing on the 19th August about the two likely outcomes from that test, which were a very bearish strong reversal there, or a very bullish break above the 1440-50 area. You can see that post here:

I’ve also posted several charts in support of a bearish outcome at this test over the last few weeks, but the overall bear case has taken some very hard hits over the last few days, and the case for a bullish outcome has strengthened considerably.

Firstly the downtrend on EURUSD and the uptrend on USD have both been broken with a lot of confidence on Friday. EURUSD broke the declining channel there and USD broke below the main rising support trendline. Here’s the USD daily chart showing the break, and the last four breaks like this over the last five years have all led to trends in the direction of the break that lasted several months at least:

The other break on Friday was copper breaking declining resistance from the 2011 highs. You can see from the 32 year chart below that copper is still at nosebleed levels historically, but at least some more upside looks likely, and the large H&S pattern forming on copper is now in serious doubt:

Lastly I posted the MSWorld chart back a few weeks ago showing the fully formed H&S there, and the declining channel from the 2011 high that would need to hold to maintain a bearish outlook there. That declining channel has now broken up and retested, and I would expect at least a move to retest the 2012 highs and declining resistance from the 2007 high in the 1600 area. On a new high for 2012 I would be looking for a retest of the 2011 highs in the 1850 area. This is now a distinctly bullish looking chart:

A bullish outcome isn’t assured here, and much depends on whether the European Central Banks truly now has the authority to print money as needed, but if they can, then what is effectively a large European QE push is in progress and that would look bullish for equities over the next few months at least. From a technical standpoint the odds have now shifted towards a break up through 1440/50 resistance on SPX, with a likely test if that happens of the 2007 highs on SPX and no big reversal on equities until 2013.

Short term however SPX is very overbought, and trading well above the daily bollinger bands. A short term high below 1470 is likely, followed by a retracement that would test support at either the 1422 or 1400 areas. That test would now look like a buying opportunity.

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Technical Drama

I’m away on a long weekend and my internet access is a bit limited, so I did the charts for this weekend write-up shortly after the open on Friday, and just before Bernanke’s speech at Jackson Hole. It was already clear what the key chart of the day was going to be however, and I posted that DX (US Dollar Futures) chart on twitter before I left for my early weekend. Here is that chart:

There is a very impressive bullish setup on multiple timeframes on the US Dollar that I wrote a weekend post about in April. You can see that here. I’ve written before that the principal threat to that bullish scenario would be another big round of quantitative easing, as quantitative easing is just a euphemism for money printing, and money printing is currency devaluation, and dollar devaluation is by definition bearish for the US Dollar.

You can see also immediately on the 5 year chart above that the US Dollar trends very well, in that when a trend reversal is confirmed by the break of the main rising support or declining resistance trendline for the previous trend, it has reliably followed that trendline break through with a sustained move in the direction of the break that has lasted several months or more.

It was therefore a moment of high technical drama with DX testing the key rising support trendline from the 2011 lows as Ben Bernanke started his speech at Jackson Hole. Had he announced another big round of quantitative easing, then DX would have broken support, the US Dollar uptrend would have been killed off by the Fed, and we would most likely have seen several more months of US Dollar weakness at the least.

As it was though, Bernanke just waffled and didn’t announced anything of substance, DX bounced and closed above that support trendline, and the US Dollar uptrend has been saved for the moment at least. What this does illustrate though is how easily any US Dollar uptrend  can be reversed by the Fed from both fundamental and technical perspectives, and from a technical perspective the current uptrend will be in doubt until the US Dollar makes a confident new high for 2012.

My second chart today is the Nasdaq equivalent of the SPX ‘Age of Irrational Exuberance’ chart that I posted last weekend, and as with that SPX chart there are both strongly bullish and strongly bearish interpretations for this chart:

The bullish interpretation for this chart is that the Nasdaq 100 (NDX) broke over channel resistance in early 2012, reversed at the 50% fibonacci retracement of the decline from the Tech bubble high to the 2002 low to retest that broken resistance at the 2012 summer low, and is now powering up again towards towards new highs.

The bearish interpretation of the chart is that NDX is forming a perfect double or M top, with the ideal high between that 50% fibonacci retracement at 2805 and the major resistance level at the summer 2000 low at 2897. Only if NDX can break up through 2900 does this chart start to look definitively bullish, and only if NDX reverses between 2800 and 2900 and then goes on to break the summer lows does the chart look definitively bearish. We shall see, but looking at copper, EEM, the Dow Theory divergence between the Dow and Transports indices, and the currently still intact uptrend on USD, I’m still leaning towards the bearish interpretation at the moment.

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marketshadows

The Age of Irrational Exuberance

I’ve been expecting at least a short term swing high on SPX in the area between the April 2012 high and the 1440 area SPX pivot resistance, and we may have seen that last week. On SPX the close on Friday was at possible declining channel resistance and the retest of broken rising support from 1329. If SPX continues down then there is a small head and shoulders pattern in play with a target at rising channel support from the June low in the 1375 area.

However there is often a sharp spike down before a true swing high on SPX, and if SPX breaks up on Monday I have sketched in two more options for making a more definite high on the 60min chart. The first option would be a second high in the 1420-1445 area to make a double or M top, and…

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The Age of Irrational Exuberance

The Age of Irrational Exuberance

I’ve been expecting at least a short term swing high on SPX in the area between the April 2012 high and the 1440 area SPX pivot resistance, and we may have seen that last week. On SPX the close on Friday was at possible declining channel resistance and the retest of broken rising support from 1329. If SPX continues down then there is a small head and shoulders pattern in play with a target at rising channel support from the June low in the 1375 area.

However there is often a sharp spike down before a true swing high on SPX, and if SPX breaks up on Monday I have sketched in two more options for making a more definite high on the 60min chart. The first option would be a second high in the 1420-1445 area to make a double or M top, and the second would be a high in the 1435-1445 area to make the head on a larger head and shoulders pattern. Both of these options involving a higher high would have targets clearly below rising channel support from the June low, and would therefore be a more definite swing high:

I was looking at the longer term TLT chart last week and I’ll follow up on that this week with my very long term TYX Monthly chart this week. This is the chart of 30yr Treasury Bond Yields from the mid-80s and shows the amazing 27yr declining channel in bond yields that has defined most of the 31yr bull market in bonds since 1981. The next channel target is in the 15 (1.5% yield) area but you can see that there are a couple of decent bottoming options in the medium and longer term.

The medium term bottoming option is that an inverted head and shoulders pattern is forming with the neckline in the 35 (3.5%) area and the target is at declining channel resistance in the 45 (4.5%) area. The next moves would be a test of the 35 area to complete the head, then a sharp retracement to make the right shoulder, then to play out to the 45 area target.

The long term bottoming option is that a double or W bottom has formed at the 2008 and 2012 lows. the high between the lows is in the 48 area, and on a conviction break over that the target would be at resistance in the 71.6 to 72.3 area. A conviction break over declining channel resistance in the 45 area would of course signal the end of the long bull market in bonds:

Lastly today I’d like to show another very long term chart, this time of the SPX since 1980. I’ve marked on the chart Greenspan’s 1996 Irrational Exuberance speech where, after a rise in equities of almost 700% since 1980, he mused on the difficulty of identifying when asset prices had become detached from reality. Initially the markets fell in the expectation that the Fed might take some action to rein in soaring asset prices, but then when it became clear that wasn’t going to happen, equities broke over resistance and stepped through the looking glass into the Tech bubble of the late 1990s:

What are the shorter term take-aways from this chart? Firstly that the weekly RSI is showing negative divergence on a scale that has generally been seen in the past near major highs. Equities might break through that as they did in 2005, but it is a warning signal. Secondly there is a decent resistance trendline from 2008 with resistance currently in the 1450 area, slightly above the 1440 area SPX pivot, and that range between that pivot and that trendline is the key area that SPX must break over to have a chance at testing the 2007 highs.

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Critical Tests Coming

Critical Tests Coming

By Springheel Jack

Very critical levels are now being approached on a number of markets across the world. Let’s look at some charts and the likely consequences if particular levels are broken.

On the SPX chart below, I have broken the moves up since March 2009 into three completed bull moves into the 2011 high at 1371. Those three moves rose 290, 350 and 360 points respectively. Each reversed at an established major resistance level, with the first move reversing in 2009 at the 1998 and 2001 lows, and the 2002 double-bottom neckline. The second move reversed in 2010 at the 1999 and 2006 lows, and the third move reversed in 2011 at the 2007 low. This was a textbook technical structure, and very similar to the 2003-7 bull market for the moves up.

After the short bear market in 2011, a new move up started in October 2011, reversing after 350 points at a level 18 points below the next obvious resistance level, which is at the 2008 high of 1440.24. That level was never tested, and this up move can currently be interpreted in two ways.

The bearish interpretation is that the move up from October is still ongoing, with a likely failure at the test of the 2008 high in the 1440 area, and the retracement into June was a set up for a double-top indicating to the 1090-1110 SPX area, effectively testing the October 2011 lows.

The bullish interpretation is that the move up from October 2011 was completed at 1422 after a standard 350 point move, and that a new move up has started from the June 2012 low at 1266, with a likely target between 1556 (290 point move) and 1626 (360 point move). At a break above 1576, SPX would be at all time highs and there would be no established resistance levels above to fail at.

If the bullish interpretation is correct, this would quite possibly be the second wave of what would be a three wave move, which is why the Elliott Wave guys are excited. I’m leaning towards the bearish interpretation, mostly because of the weak economy and the Euro backdrop.  We’ll only find out after the 1440 level is tested:

There is a similar setup on many other markets. For example, the Emerging Markets ETF. On EEM, no new high has been made since the 2011 high, and a very bearish looking head and shoulders (H&S) pattern has largely formed. If this completes forming and plays out, then the target would be almost a full retracement of all gains since the 2009 low.

The key resistance level being approached on EEM (which fits with approaching resistance on SPX), is at declining resistance from the 2011 high. If that is broken and held, it will break the downtrend since 2011. If it reverses and closes a week below rising channel support from the 2009 low, that would be a clear break of the uptrend since 2009, with the next big support test at the neckline of the then-completed H&S pattern. SPX and EEM breaking up through resistance together would be a powerful confirmation that the bullish scenario is playing out.

Many analysts have been somewhat bearish on equities since the April highs due to the very strong performance on bonds since then. Bonds weakened substantially this week. TLT broke strong trendline and level support at around 124, and is now in a downtrend. If it breaks below the next trendline support in the 118 area, I expect further retracement into the 112 area, and possibly into the next major support level in the 108 area.

A move of this size on a break below 118 area support would most definitely look bullish for equities.

Since the 2008 crash we have moved into a strange looking-glass world of vast sovereign deficits, money printing, punitively low interest rates on all cash investments, and central bank policies designed to boost stock market valuations.

In this environment, fundamentals don’t mean what they used, but the technical structures of markets still look as effective as they ever were.

I’m doubtful about the case for testing the 2007 SPX highs soon, but if we see the technical levels break, that will be the next obvious target and the break up should be respected until there is strong evidence to the contrary. All eyes here should be on the 1440 SPX area.

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Fork in the Road

Fork in the Road

Springheel Jack’s Weekend TA Update

We’re reaching critical levels on a number of charts. A potential double-top is forming on SPX chart, just below the critical 1440 area pivot.

Similar resistance levels are being approached on numerous equity indices. For example, the MSWorld chart for world equities ex USA shows a beautiful reversal head and shoulders pattern pointing back to the lows over the last decade. There is also a declining channel from the 2011 high. A break in the declining channel – being tested now – would be very bullish.

 

 

On the flip side, there has been a strong correlation between world equities and the Euro over the last decade, but the prospects for the Euro are dimming. Even the pro-euro Economist conceded this weekend that there may be no alternative to a Euro break-up in one form or another.

If equity bulls can drive equity indices over resistance then the technical setup for a test of the 2007 highs on SPX will look good, but that still seems unlikely.

Dow Theory watches the The Dow Industrial Average and the Dow Transportation Average, looking for a divergence between the two. If one makes a new high while the other does not, it often signals a reversal. We saw divergences at the 2011 and 2012 highs. There is a very strong divergence right now:

 

 

Bulls might yet win. Equities often do well during the second half of the presidential election year. But the Euro backdrop and the technical setup aren’t making that look easy. If the indexes fail to go higher, we may see a brutal bear market in the future.

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