I’m going to be a little lazy with today’s blog, but I have serendipitously come across two charts in the last few days, both of which strengthen my view that a significant top is in place for the major US indices.
Before going on, I want to clarify that I don’t believe this is the end of the bull market for US stocks, but rather the beginning of a healthy pullback (remember those?! – I’ll give you a clue… they used to happen on a fairly regular basis before the money printing operation began!).
Judging by the market’s reaction to Ben Bernanke’s press conference last Wednesday, you would be forgiven for thinking the world is coming to an end. It’s not and nor is QE (it’s just being scaled back). This looks like a typical overreaction, but my hope is that a decent bout of selling will present an excellent buying opportunity in Q3 or Q4 this year. Personally I believe the market was looking for an excuse to sell off and Bernanke gave it, as I thought he would.
I am now planning to trade to the short side, either until I’m proven wrong and the market resumes its upward momentum or the indices approach long-term technical support, at which point I will look to buy.
Anyway back to the charts, first we have this little offering from ZeroHedge;
Although it has a fairly unreliable reputation, I speculated the week before last that this time the Hindenburg Omen could well prove to be correct. It has since fired again and the accelerating fall in equities has captivated global headlines.
It is now too late to use the Hindenburg Omen as a trading signal other than seeking confirmation that a new trend has begun (in the near term at least). However the next chart could well provide an excellent opportunity to go short, if the technical pattern completes:-
Borrowed from 321Gold.com I had been planning to draw something similar myself (honestly, I promise that is the truth!!!!).
This chart nicely demonstrates that we could be about ¾ of the way through a classic Head and Shoulders pattern. Broadly speaking, the Dow needs to fall to about 14,450, rally back to a touch under 15,000 and then start its decline again for the pattern to complete.
If this price movement occurs (roughly at least), deciding on your entry point depends how aggressively you want to trade the position. I am already short, but have taken some profits and plan to take some more. I am well positioned to back up my view that this move down has a lot further to go. If the market makes another attempt on 15,000, I am likely to sell into that quite vigorously.
However the time might not quite be yet. Ideally I would like to see the index drop a bit further (to about 14,500), before it attempts to recover.
Of course I can’t guarantee such precise movements, so I will keep watching and adjust my view as the market evolves.
Whatever the case I am not more convinced than I was last week there is likely to be more selling for the rest of the summer.
** To finish on a separate note, watch out on Wednesday for the release of Bank of England’s semi-annual Financial Stability report. It should be published here and could give an indication if the BoE is likely to engage in more QE, once Mark Carney takes over the helm at Threadneedle Street after July 1st. I am still awaiting confirmation, but my initial view is the only reason the BoE hasn’t stepped up its QE programme is because of the changing of the guard. If this is right, then watch out for further Sterling weakness.