It has been almost a month since my last update so I thought I would provide a more in-depth analysis of the markets and where I see them going. As such, this update will be somewhat longer than usual.
Firstly, it must be mentioned that the current short term downtrend was NOT the result of the earthquake in Japan. While it is true that the start of the decline occurred with that event, the market had been ripe for a sell off the past several months. It had gone too-far, too-fast and was in need of a correction to reduce the overly bullish sentiment. The Japan quake was the trigger event but the requirement for a short term decline was already baked into the cake.
The markets today are dealing with a tremendous amount of uncertainty given the current nuclear reactor troubles in Japan and the ongoing war in Libya. Markets hate uncertainty and when either of these 2 events (more so the Japanese situation) gets resolved (as it will at some point), the markets will be ready to resume their uptrend.
It is best to review where we are at from a top-down 41,000' view to the ground view. When deciphering market action I use the S & P 500 Index (as it is composed of the 500 largest companies in the U.S. and is 100% equity oriented unlike other large indexes such as the NYSE Composite Index which has a large fixed income component).
I take the index and divide it into 3 distinct time frames: short term, medium term and long term. I have built charts designed to reflect the price action along these time frames.
CLICK ON ALL CHARTS TO ENLARGE:
LONG TERM CHARTS:
Long term charts are ones that look out over months/years and give us a broad view of the long term overall directional trend in the markets.
I use the long term charts as part of a two-part trading system (along with the medium term charts) to position myself either long, in cash or short the market.
The first chart is the 11 year monthly chart of the SPX. Drawn on the chart is the 12 month simple moving average (blue line). As can be seen going back to 2000, this line was very good at defining the "bull market" vs. the "bear market" and was one of 2 indicators I used to exit the markets in late 2000 (thus avoiding the "tech wreck" stock market decline of 2001-2003) and also in Dec, 2007 (thus avoiding the 2008-2009 "housing bust" stock market decline).
While it's record is pretty good, it unfortunately had some whipsaw action in June-Sept 2010 (June closed below the 12 mSMA, July closed above the 12 mSMA, Aug closed below the 12 mSMA, and Sept closed above the 12 mSMA). However, since Sept 2010 price has remained above the 12 mSMA so from a long term perspective we remain within an ongoing bull market.
The second of my long term charts is a weekly chart of the SPX with 13 week and 34 week exponential moving average lines (if interested, 13 and 34 are Fibonacci numbers; Google "Fibonacci Sequence" for more information if interested). As long as the 13 wEMA is above the 34 wEMA we are in a bull market.
Again this chart has an excellent track record going back 30 years. It did experience some whipsaws in June-Sept as did the monthly chart previous but since the 1st week of Sept it has been bullish.
Based on the above, it can safely be assumed that the
LONG TERM TREND IN THE MARKETS IS BULLISH.
MEDIUM TERM CHARTS:
Medium term charts are designed to give us a clear view of the next 4-8 months.
I use medium term charts as part 2 of the trend following system to have me either long the markets, partially in cash, totally in cash or short the markets.
I use 2 charts to understand the medium term direction of the markets. The 1st is a weekly chart with a number of technical indicators attached. When price is above the thin dotted line (the midpoint of the Bollinger Band which equates to the 20 week simple moving average) ALONG WITH THE TECHNICAL INDICATORS BEING IN AGREEMENT then the intermediate term trend is up. As of today, this is the case.
As can be seen, this chart did a pretty good job going bullish at the end of the 2008-2009 decline (when price closed the week above the BB midpoint the last week of March, 2009). There was a minor 3 week correction in Jan-Feb 2010 before the next bullish signal and a longer 18 week bearish indication in May-Aug 2010. Since then the chart has remained bullish.
As of today, the SPX would have to CLOSE THE WEEK below the dotted line (currently at 1272.06). We have yet to do so therefore the intermediate term on this chart remains bullish.
The second chart I use to monitor the intermediate trend is the Point and Figure Chart (standard settings; also referred to as the PnF chart). The nice thing about PnF charts is they are strictly based upon PRICE whereas line charts are based upon price and time. As such, PnF charts are great at cutting out the "noise" of the market and giving you a good indication of price action.
On PnF charts, columns of X's are bullish and columns of O's are bearish. Chart indicators change bullish when the current X column closes above the previous same category of X column to left and bearish when the current O column closes below the previous same category of O column to the left.
This chart turned bearish when the SPX posted a closing price of 1290. If the markets were to go straight up from here a buy signal would not be initiated until a closing price of 1340 or greater.
As can be seen, from an intermediate point of view we have 1 chart that remains bullish and 1 chart that is currently bearish. As such, based on the above, it can safely be assumed that the
Intermediate/medium TERM TREND IN THE MARKETS IS NEUTRAL until both these charts come into alignment and give us a better signal.
SHORT TERM CHARTS:
Short term charts are designed to allow us a view of the next 1-2 weeks in the market.
The first short term chart is a 6 month daily candlestick chart of the SPX. The chart is bullish as long as price remains above the Bollinger Band midpoint (thin dotted line) ALONG WITH THE TECHNICAL INDICATOR BEING IN AGREEMENT.
As can be seen, this chart turned bearish on Feb 23 (red vertical line) and remains bearish as of today. It would take a close above 1302.46 along with the technical indicators coming into agreement for this chart to turn back to bullish.
Also shown on the chart is a strong area of resistance at the 1305 level. In addition, the 50 day moving average has acted as strong support/resistance on the daily chart over the past number of months. It is currently at 1304.32 and is resistance until taken out.
A daily close above 1305 on the daily chart would be a bullish short term development.
The second of my short term chart is the 1-box Point and Figure chart. I like the 1-box PnF for reasons discussed previous with the daily PnF chart.
As can be seen, price turned bearish when a price print of 1303 was recorded on the SPX. It remains bearish as of today.
The last of my short term charts is the 60 minute trading chart. Once again a 13 hour exponential moving average and a 34 hour exponential moving average is used along with the associated technical indicators.
This chart is designed to give me an early "heads up" when a trend change may be occurring. It also shows good areas of support and resistance.
This chart turned bullish on March 21. Since then price has moved in a consolidation zone (shown by the 2 horizontal red lines). A price print above the last high (1300.58) would be encouraging but I would like to see the strong resistance between 1295-1308 taken out before feeling confident this current decline is over. We are not there yet.
Based on the above, it can safely be assumed that the
SHORT TERM TREND IN THE MARKETS IS BEARISH WITH A POSSIBLE FIRMING OF PRICES AT CURRENT LEVELS. It is still too early to commit further to the long side but if I were short the market I would be covering some of those positions at current levels.
A close above 1305-1308 would be a very bullish development and would probably set up the next up leg in this ongoing bull market.
Elliott Wave:
Elliott Wave is a technical attempt to measure where the markets are going to go. Unlike traditional technical analysis (which is not "crystal ball gazing" but analytical trend following), Elliott Wave attempts to define market waves to predict future market direction.
While a number of people use this technique extensively (or exclusively), in my experience I have found it to be of little use other than to define the "possibilities". The problem is it is too subjective to be of much use shorter term except in obvious long cycle waves (the standard joke shared by most non-EWT technicians is if you were to put 12 Elliott Wave practitioners in a room, they would fail to reach an agreement on wave count and the direction in which a stock/index/commodity/currency is headed. Then in hindsight they would refer to their "alternate count" after the event took place to show how right they were).
In any case, I do find EWT theory useful in defining the trend. Based on that, here are my counts for the weekly (long term) and 60 minute (short term)
The basic premise of Elliott Wave is the TREND (either an uptrend or a downtrend) is composed of a series of 5 waves (3 in the direction of the trend and 2 going against the direction of the trend).
From the 2000 top the market entered a wave 4 decline (not shown on this chart) followed by a 5th wave advance. This wave would normally have exceeded the top in 2000 but stopped at the same level (known in EWT as a "truncated" 5th wave). From that point the 2008-2009 decline began.
There was a lot of fear that the drop from 1576 to 666 was A of an A-B-C correction. When the markets topped at 1220 in April 2010 there was the very real possibility that wave B had topped and wave C had begun (shown in red on the chart). If this count was correct, the target for wave C would have been 310 on the SPX and would definitely have heralded a severe depression in the U.S./worldwide.
As we know, the Fed came to the rescue with hundreds of billions of dollars to prop up the banks. In the process, it appears they derailed what should have been wave C and instead started a new bull market. This was not apparent until late Nov, 2010 when price broke above 1220 (prior resistance) along with 1228 (the 61.8% Fibonacci retracement level from the 1576-666 decline; the point I annotated on the chart that the A-B-C scenario was off the table). At that point the A-B-C scenario was taken off the books and we can now look forward to a 5 wave bull market.
As I have shown in green, we are currently in wave 3. If so, then this bull market has much further to run (top of wave 3 would be around 1563 followed by wave 4 down and then wave 5 up). Wave 5 could again truncate as it did before (but by rule of alternation this should not happen in Elliott Wave Theory). As such, we should expect an ultimate final top well above previous highs set in 2000 and 2007.
This chart is a 60 minute EWT chart. As can be seen, the 1st sub wave of the wave 3 discussed previous is also broken down into 5 waves. We are now in an A-B-C correction (which will be sub wave 2 of wave 3). Once this is done, expect a sub wave 3 up, sub wave 4 down and sub wave 5 up to complete wave 3.
A natural point for wave C would be the 38.2% Fib @ 1216.80 or the 50% Fib @ 1177.49 (which also has strong channel support). It would be really healthy for the long term if the markets were to correct to this level and scare some of the extreme bullishness out. Whether we get there or not remains to be seen.
Bottom Line:
-My short term technical indicators remain bearish with the intermediate term indicators neutral and the long term indicators still bullish.
-Combined with the bullish cycle period we are currently in (yearly cycle bullish, 4 year cycle bullish), we have entered the technical "sweet spot" for equity investing.
-The markets were due for a pullback within this ongoing bull market run. We are currently experiencing that.
-Based upon long term Elliott Wave Theory, we still have much further to run before this bull market completes.
I have been waiting for an opportunity to increase my equity exposure within the Provident Fund. It appears that moment has arrived. I will be watching my short term indicators closely and when they return to bullish I will be increasing my equity exposure within my Provident Fund account to a 75-100% equity position. The further we decline in this correction, the more bullish I will become and the more willing to commit a full position to equities. A smaller correction and I will feel less confident (and therefore commit less than 100% capital).
Any changes will be blogged when completed.
Emirates Provident Fund:
As of Thursday, March 24 I remain in a strategic 25% equities/75% USD cash weighting as follows:**
-BlackRock US Dollar Cash Portfolio Fund: 75%
-Russell Global 90 Fund: 15%
-Fidelity International Fund: 10%
**Actual positions will change daily based upon price action and market volatility.
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dwaynemalone1@gmail.com
