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CHART OF THE YEAR: THE MOTHER OF ALL DOUBLE TOPS 15 comments
The S&P 500 is one of the very best overall market risk barometers, so it pays to watch it closely. I recently read an article about a forming "Golden Cross" chart pattern, and another one, The Mother Of All Head And Shoulders chart pattern (for 1987 - present).
In reply, I present an excerpt from my coming book, The Sensible Guide To Forex. Forget the above patterns. For a really significant long term pattern, check out the mother of all double top patterns:
First, here's the very bearish looking double top that's formed from 1999 - late
2011.
Figure 1: S&P 500 MONTHLY CHART DECEMBER 1999 - SEPTEMBER 2011 (fig 11.3)
Source: Metaquotes Corp as shown in The Sensible Guide To Forex: Safer, Smarter Ways to Survive and Prosper from the Start, Cliff Wachtel, Wiley & Sons, 2012
Key points to note:
1. We have a bearish double top. The bearish long term pattern is supported by the nascent downturn in most of the longer term exponential moving averages (EMAs).
2. However, a valid double top pattern needs to be preceded by a long uptrend. The chart below of the S&P 500, dating back to 1950, shows that we do indeed have a prior uptrend and also shows the 60 plus year perspective to show how significant this current double top is, the first decade long topping pattern since the 1970s.
S&P 500 1950 to 30 SEPTEMBER 2011 Source: Yahoo! Inc (fig 11.4)
3. In Figure 1 note the double top formed in2000 AND 2007 (A and B) with the lower high (C) in May 2011 that confirmed the double top.
4. Additional confirmation of the longer term bear market in risk assets that began in the summer of 2007 includes a close below the major EMAs well as all shorter term EMAs in September 2011. The index has rebounded to around 1300 recently but hasn't yet decisively broken its downtrend line since then. With Europe's current mess we must still view the rally of the prior week's as just another short term technical bounce.
For us to really believe in the technical picture, we prefer to see supporting fundamentals. We have them. The consensus fundamental outlook is:
So the bearish technical pattern indeed has support from the underlying long term fundamental picture.
Our conclusion remains that for our long term portfolio, we should seek strategies that will benefit from a bear market.
As we'll discuss in future posts,(and more fully in the book), unconventional, conservative low and no leverage long term forex strategies can be an ideal way to play this long term trend through the currencies that are correlated to it. The fundamentals of nations turn around much more slowly than those of companies, so the long term trends of major currencies and currency pairs can be much more persistent and reliable than those of stocks.
If you want to know more about how to protect yourself against risk of crashing markets and currencies, stay tuned for details about my coming book, THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start. It's the first book to show how prudent, traders and long term investors with limited time and risk tolerance can tap forex markets to hedge currency risk and improve returns.
DISCLOSURE /DISCLAIMER: NO POSITIONS. THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN'T BE TELLING YOU FOR FREE, NOW WOULD WE?Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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This post has 15 comments:
FYI I discuss this problem at length in my coming book on lower risk, simpler, less demanding ways that lay investors can play with forex markets (either as traders or long term passive investors) for lower currency risk & better returns than the standard short term high risk high leverage approaches typically used in online forex trading. Hope to have the corrected catalog blurb up on amazon in the coming week,
just search: The Sensible Guide To Forex: Safer, Smarter Ways to Prosper from the Start.
My attempt to deal with a huge problem we all must face.
What is a bit of a puzzler is why the euro has held up as well as it has? With ECB balance sheet now larger than Fed balance sheet, with Dec/12 LTRO of over 500 billion euros, and with looming 2nd LTRO estimated to be as much as another 1-1.5 trillion euros (EU banks have indicated they may 2x or 3x the initial LTRO), then one would think the euro would be crashing hard.
Any thoughts or comments?
You're correct in saying that charts by themselves don't tell the whole picture, need evaluate in context of the Long term fundys driving those patterns.
I think you do well to cover an area not well understood by the typical investor, even those that have a reasonable understanding of exchange rates and their "help and hurt" effects.
If one can harness enough of this knowledge and power to assist in protecting assets , then the effort will be well worth it.
The tendency for sovereign powers to manipulate their currencies is tricky and tedious business to assess and keep current about so any solid and timely help on this is greatly appreciated.
for that very reason wrote book, coming out this summer. In about a week should have proper catalog blurb on amazon & on my profile here at SA, etc.
all about helping lay investors find low risk, simpler ways to get currency diversification for lower risk, better yld portfolios either as active (but prudent) traders or long term passive investors
stay tuned.
For what it's worth, current S&P earnings are double 1999, yet the indices are at the same price levels, meaning the nominally-valued P/E's have been cut in half. This is another reason why a long downtrend appears most unlikely unless earnings collapse, but that, too, appears unlikely because with inflationary currencies virtually everything gets repriced upwards, revenues, profits and share prices, included.
There is no such thing in the investment world as "real basis" or "adjusted for inflation." There's only today, as measured in nominal terms. All the price deflators back to 1980, 1930, 1900 are meaningless because one can only deploy and meaure performance in today's tangible dollars. That's all there is. And, no matter what any analysis of "real" dollars would tell one, it's also without value because nobody can control inflation (i.e., the price deflator), so it's almsot pointless to consider it from an investment context.
So, the mission of all investors is to maximize their portfolio growth among the investment alternatives that they can access. There isn't any other game.
Unit volumes could stagnate indefinitely, and as long as currencies are inflated and prices increase, then the revenues, profits and, ergo, share prices would increase on nominal terms, assuming that P/E's remained in some channel. In any event, the idea that growth has been forever suspended, is just the kind of silliness that come to the fore in periods, like now, when things are sluggish.
In fact, we are in an unprecedented period of global expansion of people coming into the world of commerce in China and in other just emerging markets. The markets have been depressed by fear, and some bad monetary policies, not by any reality about future demand equations. If there's a risk, in my opinion, at least, it's to all those folks huddled in their Malthusian fantasies that we've reached some kind of historical apex, and we can only descend from here. That's a kind of societal hubris, that suggests that we're the paramount society and the end of expansion, as if it all came before us. This is just patent nonsense, and the world will continue to expand in population, demand, output, etc., long after we're all gone.
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