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Stock Market Strategy Update: NYSE Comp Head & Shoulder Breakdown

Stock Market Strategy Update: NYSE Comp Head & Shoulder Breakdown

The equity markets are currently stuck in a nasty vortex of news stories. Stocks indices are lurching from one headline to another and the action is moving at lightening speed. I’ve thought long and hard about typing my thoughts and predictions concerning the various events unfolding in the last two weeks and have come to the conclusion that such action would be futile. Until the news cycle slows down and all the facts are out I feel any prognostication would be based on incomplete evidence and would in fact be misleading the minute the words are typed. Since I love to communicate my thoughts you can imagine how difficult it is for me to refrain from writing, but I have sworn to separate fact from fiction on this blog and at the moment the lines are too blurred and the velocity of fresh headlines too great.

At times like this, I’ve found technical analysis to be the best succor. The proverbial ‘a picture is worth a…’ comes to mind.

Last week (Aug. 2nd) we published the daily price chart of the NYSE Comp. index. The chart clearly illustrated a nasty H&S pattern that was breaking down.  We advised immediate defense of a portfolio and healthy exposure to Gold and Silver.  Let’s take a look at the same chart today and see what has occured….

Cnyse88

We can see the dramatic breakdown of the H&S pattern has retraced 76.4% of the QE2 rally that started last September. I’ve added theFibonacci retracement lines to give us an idea of where support may occur.

Now let’s see a bigger picture and view the weekly chart of the same breakdown…

Cnyse88w

Here we see two Fibonacci retracement lines converge. The daily 76.4% line and the weekly 38.2% retracement line going all the way back to the beginning of the QE induced rally of 2009 meet at 7112. This analysis would suggest that some real support may be found between the 7000 – 7100 area of the NYSE Comp.. I would like to add here that even the most vicious breakdowns are replete with snap back rallies that offer better opportunities to raise cash and/or add to short sales. In fact, often a retest of the initial neckline breakdown from a H&S will occur which in this case would necessitate a rally back to 7982 on the NYSE Comp.; an approximate 11.5% move higher from today’s prices.

In conclusion, let’s have some fun and look at the weekly chart of the Gold ETF (NYSEARCA:GLD) going back to the start of QE in 2009….

Cgld88

Not much needs to be written to explain this chart. One glance will reveal a powerful uptrend as a result of worldwide currency debasement. I fear anymore musings about this chart would sully the simplistic beauty of our investment thesis. We have advocated significant portfolio exposure to the precious metals for 5 years now and will most likely continue to do so until the currency debasement trend is exhausted.