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CHART OF THE YEAR: THE MOTHER OF ALL DOUBLE TOPS

|Includes:CEW, CNY, CYB, DBV, DIA, DRR, DUG, ERO, EUO, FXA, FXB, FXC, FXD, FXE, FXEN, FXF, FXY, GLD, ICI, JYF, NBO, OIL, SDS, SLV, SPDR S&P 500 Trust ETF (SPY), UDN, ULE, URR, USL, USO, UUP

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 FIG 11 3 Chart of the Year: The Mother Of All Double Tops2011.

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.

FIG 11 4 Chart of the Year: The Mother Of All Double Tops

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 (NYSE: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:

  • Best case scenario: years of slow growth under the burden of global deleveraging
  • Worst case scenario: a wave of sovereign and banking insolvencies in the EU that spark another market crash and recession similar or worse to that following the Lehman Brothers bank collapse in late 2008

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.

Stocks: SPY, DIA, SDS, UUP, UDN, FXE, ERO, URR, ULE, EUO, DRR, FXA, FXB, FXC, FXD, FXF, FXEN, FXY, JYF, CYB, GLD, CNY, USO, DUG, USL, NBO, DBV, ICI, CEW, SLV, OIL