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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
My company:
THE SENSIBLE GUIDE TO FOREX
My blog:
THE SENSIBLE GUIDE TO FOREX
My book:
The Sensible Guide To Forex: Safer, Smarter Ways To Survive & Prosper From The Start
  • CHART OF THE YEAR: THE MOTHER OF ALL DOUBLE TOPS 15 comments
    Feb 1, 2012 5:00 PM | about 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

    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.

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Comments (15)
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  • Cliff Wachtel
    , contributor
    Comments (1778) | Send Message
     
    Author’s reply » why we're bearish long term on risk assets summary of technical & fundy perspective
    1 Feb 2012, 05:05 PM Reply Like
  • carlprice
    , contributor
    Comments (30) | Send Message
     
    Looking at the SP500 big picture over multiple decades.....this recent decade, 2000 to the present, can pretty much be construed more than one way. Yes!....a double head, triple head, or head and shoulders over this past decade has the potential to materialize and break downward... BUT...there also is the stronger possibility that these "triple heads" are merely a 10 year "consolidation" or breather which followed a huge ten-fold stock market run-up in the 90's. With Bernanke and the Global economies now turning on the printing press full blast to inflate the world out of it's debts...I believe the stock markets will also inflate (break upwards) from this consolidation. GET ON-BOARD THE INFLATION GRAVEY TRAIN NOW! for multi-year up-trend! Get ahead of HYPER-INFLATION PAIN just around the corner! Commodity stocks should do well!
    1 Feb 2012, 06:16 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9933) | Send Message
     
    So what happens to interest rates in high or hyper inflation? Would rapidly rising interest rates be good for equities? What does history show regarding high inflation, rising interest rates vs. equity prices?
    1 Feb 2012, 06:54 PM Reply Like
  • Cliff Wachtel
    , contributor
    Comments (1778) | Send Message
     
    Author’s reply » especially if you can get them in shares not denominated in one of the inflating currencies. otherwise the weakening currency offsets the stock's gains.

     

    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.
    2 Feb 2012, 05:22 AM Reply Like
  • untrusting investor
    , contributor
    Comments (9933) | Send Message
     
    Cliff,
    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?
    2 Feb 2012, 10:58 AM Reply Like
  • Cliff Wachtel
    , contributor
    Comments (1778) | Send Message
     
    Author’s reply » short term trading rally as EUR was 'technically' oversold - fundamental situation still dire & once Greece defaults get wave of sov & bank defaults fear and bond yields soar beyond what GIIPS can pay -- unless ECB starts massive bond buying/QE to keep that from happening - but if ECB starts acting too much like Italy, - Germany & Holland may leave. When? depends on when they decide they're ready to bail out their own banks & is cheaper than unending GIIPS bailouts
    2 Feb 2012, 11:46 AM Reply Like
  • Cliff Wachtel
    , contributor
    Comments (1778) | Send Message
     
    Author’s reply » could be, but note I added bearish fundy picture from EU as another reason I read overall picture as bearish.

     

    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.
    1 Feb 2012, 06:26 PM Reply Like
  • change is the only constant
    , contributor
    Comments (1747) | Send Message
     
    Thanks for the perspective Cliff.
    2 Feb 2012, 07:55 AM Reply Like
  • SeekingTruth
    , contributor
    Comments (1185) | Send Message
     
    Cliff,
    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.
    2 Feb 2012, 10:37 AM Reply Like
  • Cliff Wachtel
    , contributor
    Comments (1778) | Send Message
     
    Author’s reply » thanks,

     

    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.
    2 Feb 2012, 11:49 AM Reply Like
  • Tack
    , contributor
    Comments (13228) | Send Message
     
    As long as currencies inflate, prices inflate and earnings rise in nominal dollars, share prices --and, ergo, indices-- will follow. Of course, there will be the usual temporary jigs and jags, as when markets get ahead or behind on a relative P/E basis. But, betting on an extended downturn in an inflationary money supply sounds like a sure suicide mission.

     

    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.
    2 Feb 2012, 11:21 AM Reply Like
  • Cliff Wachtel
    , contributor
    Comments (1778) | Send Message
     
    Author’s reply » at least in nominal terms before adjustment for inflation
    2 Feb 2012, 11:53 AM Reply Like
  • Cliff Wachtel
    , contributor
    Comments (1778) | Send Message
     
    Author’s reply » how do earnings keep rising if consumer wages flat/declining? Cost cutting only goes so far. at some point you actually need to sell more stuff. Emerging markets? maybe, but they're mostly based on exports....to stagnating developed world
    2 Feb 2012, 11:54 AM Reply Like
  • Tack
    , contributor
    Comments (13228) | Send Message
     
    Cliff:

     

    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.
    2 Feb 2012, 12:00 PM Reply Like
  • Tack
    , contributor
    Comments (13228) | Send Message
     
    Cliff:

     

    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.
    2 Feb 2012, 12:09 PM Reply Like
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