Although we have reached as high as the 4490s on Friday after non-farm payrolls, as we immediately shifted down we can safely say that the triple top play that was noted last week could still be in play. In fact, the bulk of the action occured below the 61.8% retrace from the 4510s top. Also, note below how the previous ascending trendline as now acted as resistance. It remains to be seen how we will play out of this wedge: still 4300 and 4500 are the key levels.
Intraday momentum, as of US close on Friday, is mixed but pointing down: however, as it has occured over the past 4 weeks this can change easily over the course of a few hours. I'll be watching the wedge above tonight as the markets light up and tomorrow morning.
Watching some longer term charts my current bias is to say that we could have some further upside. This in spite of the fact that the FTSE has been severely lagging all other indices, US, Asian and European, over the past week: the FTSE is the only index that has not made new highs. In any case, I would warn to continue to be cautious until we break out of the current 4300-4500 trading range and define a new trend.
Looking at the daily charts, please note how, in the first chart below:
- Momentum is pointing south, but at the moment it is extremely sensitive given the tight trading range: so even a 1% move to the upside would turn it back pointing up. I would disregard this indicator at the moment, unless we break below 4300 and have a confirmation from the triple top formation as well.
- The RSI has been heading down while the market has flatlined: this could be interpreted as divergence but also as the indicator "recharging" before a push higher. Divergence is more secure if a higher high (or a lower low) in price does not determine a similar higher high (or lower low) in the RSI value.
- The Bollinger bands are tightening and replicating the well known trading range: we have a upper value on the daily of 4500 and a lower value of 4297 (surprise surprise).
- Very importantly, the 60 day weighted moving average and the 200 day weighted moving average have crossed: this is something to watch carefully and to be interpreted as a bullish signal, especially if momentum doesn't fail significantly causing the 60 day weighted MA to bend and go south again.
Below is another view of the daily chart which is coupled with the Accumulation Swing Index, which often gives good indications for confirming or disconfirming trendlines and breakouts. As you can see below, while the price range has remained the same, the Accumulation Swing Index has broken above previous resistance, which is a bullish sign. However, while we have reached for the resistance made during January's high, we need to break above it to have a clear bullish confirmation.
Now, looking at the weekly chart below three points of note:
- Momentum is still looking north.
- No divergence on RSI (this is a weekly chart too, so it takes a long time to develop).
- Upper Bollinger band is still untouched by this rally.
More importantly, let's look at some long term trendlines on the weekly chart below. I am not a fan of using technical analysis over long time spans: the behavioural rules behind trendlines and support/resistance can break down over long time frames, and the composition of an index is also to be considered. I would not go further than 5 to 7 years, with 7 somewhat pushing it, but that's my opinion and I know many traders might differ.On the weekly chart below, the important things to note are:
- That the current 4300 to 4500 trading range was also found between 2003 and 2004 and lasted almost a year.
- That we could be detailing two distinct, but parallel, downward channels. Channel 1, which we broke below in September/October of last year, and Channel 2, where we have been in since then.
- Major resistance/support lines (such as 4550 and 5100) cross both these channels. If the triple top we have detailed is confirmed and we head down we would remain within Channel 2. If we break above 4500 and then 4550s area we could well be heading back into Channel 1.
That said, let's put thing into perspective. At the March lows, most markets had lost 50% or more of their value from the 2007 highs. As an approximation, from a valuation perspective that would equate to the underlying companies experiencing cash flow growth of around negative 5% to infinity. Now, how credible is/was that? Also, we rallied off from the 2003 lows: while it's true that things are gloomy, it is also true that the world keeps on spinning: families book holidays, friends go out to dinner, and so on. Maybe less than before, but regardless of that life goes on. The system is cleansing itself as bankruptcies and restructurings take place too. I would not be surprised if the March lows were the bottom of this bear market, and we are in for less volatility and a ranging market before the next bull begins.
