Year End summary of German DAX Index

To complement the charts I posted yesterday, I thought I would add the German DAX index over a longer history than I had before. As you can see from the chart below, this Index also has a Head and Shoulder Pattern which dominates its 40 year history.

Now Head and Shoulder patterns do not mean that this market will necessarily drop from here, but here is the definition for that pattern from Investopedia:

"The head-and-shoulders pattern is one of the most popular and reliable chart patterns in technical analysis. And as one might imagine from the name, the pattern looks like a head with two shoulders.

Head and shoulders is a reversal pattern that, when formed, signals the security is likely to move against the previous trend. There are two versions of the head-and-shoulders pattern. The head-and-shoulders top is a signal that a security's price is set to fall, once the pattern is complete, and is usually formed at the peak of an upward trend. The second version, the head-and-shoulders bottom (also known as inverse head and shoulders), signals that a security's price is set to rise and usually forms during a downward trend.

Both of these head and shoulders have a similar construction in that there are four main parts to the head-and-shoulder chart pattern: two shoulders, a head and a neckline. The patterns are confirmed when the neckline is broken, after the formation of the second shoulder.

The head and shoulders are sets of peaks and troughs. The neckline is a level of support or resistance. The head and shoulders pattern is based on Dow Theory's peak-and-trough analysis. An upward trend, for example, is seen as a period of successive rising peaks and rising troughs. A downward trend, on the other hand, is a period of falling peaks and troughs. The head-and-shoulders pattern illustrates a weakening in a trend where there is deterioration in the peaks and troughs.

Head and Shoulders Top

Again, the head-and-shoulders top signals to chart users that a security's price is likely to make a downward move, especially after it breaks below the neckline of the pattern. Due to this pattern forming mostly at the peaks of upward trends, it is considered to be a trend-reversal pattern, as the security heads down after the pattern's completion.

This pattern has four main steps for it to complete itself and signal the reversal. The first step is the formation of the left shoulder, which is formed when the security reaches a new high and retraces to a new low. The second step is the formation of the head, which occurs when the security reaches a higher high, then retraces back near the low formed in the left shoulder. The third step is the formation of the right shoulder, which is formed with a high that is lower than the high formed in the head but is again followed by a retracement back to the low of the left shoulder. The pattern is complete once the price falls below the neckline, which is a support line formed at the level of the lows reached at each of the three retracements mentioned above."

I hope this lengthly definition helps you analyze the charts yourself. For additional information on chart patterns, I find the book "Technical Analysis Explained" quite useful

Stock market trend and prediction going into September and beyond

It's the weekend and we have time to think, rather than do. So this morning I am going to put up a number of stock market charts and analysis to try and make sense of where we are and where we are headed. It has been a tumultuous few weeks and many are glad we have them behind us now. The past 2 days advance to yesterday's August Options expiration got many nervous. They thought we were on our way back up this week only to finish down, back at or near the recent lows, depending on which Index and Country's stock market Indexes you were looking at.

With that background, here are some 3 month charts of selected European Indexes, which should help you conclude that the recent drop in US stock markets isn't just about the US. But first 3 charts are of the US Indexes; the Dow, S&P and the Nasdaq. Then I have followed them with commentary and with charts of German DAX, France's CAC and finally Japan's Nikkei. All are 3 month charts and the thing to focus on is where are the indexes now, the similar patterns and whether the recent drop is slanting down or up or flat. If there is a predominance of slanting down below the other recent low points, we are going down more. Now the charts!

The Dow chart shows we are nearly flat across the low points. You will see in the S&P chart below, the same is true.


You can see the there is a biased slant down on the Nasdaq as this chart above does point a further down move.

The DAX also shows a slanted move down below earlier lows.

The CAC is flat at the lows, like the Dow and S&P.

And lastly, the Nikkei slants down significantly.

So what does this all mean? Well, I ask myself the question, Which world indexes are extremely important right now and which have been long term indicators of either prosperity or leading the way down. Those indexes have been the Nasdaq here in the US, Japan's Nikkei and Germany's DAX index. To me they all say we are headed down lower. You will have to make up your mind which tea leaf you will follow. Good luck on that.

One other important thing I look at. I look at the longer term chart. Here's the Dow going back about 30 years. You can see from the chart below, we are forming a head and Shoulder pattern over this period and it looks as though it has completed the formation of the right shoulder and it is a slanted down pattern.

This signifies we may ultimately be headed down to retest the lows of 6,400 eventually and may not hold at that level. Given world events which seem to be changing daily in a negative direction, I would not be surprised to see this scenario to play out. Anther thing to remember is this, markets tend to rise much more slowly than the speed of which they go down. This chart shows that clearly.

Looking at roughly the same period for the Dow/Gold ratio you will see the high point is at year 2000. All of these points were taken at 1/31 of each year, except the last point and that is Friday's data. So the trend for the ratio is continued down. The implications for this are that either Gold will continue to rise to get the ratio back to the 1-2 level again or the Dow will drop significantly while Gold either stays high at current levels or goes down some at the same time. For the Dow/Gold ratio to be at 2, then either the Dow must stay at 11,000 and Gold goes to $5,500/ounce. Or Gold to stay at $1800/ounce then the Dow must drop to 3,600. Neither scenario will really happen but adjustments to both are a more realistic possibility. Assume for a minute the Dow does go and retest the 6,400 level, and Gold pulls back to last years level of $1200, that would yield a Dow Gold ratio of 5.3, which is very close to where we are today!!

This last chart below is my short term read of the top limit of any dead cat bounce of the Dow. You will notice the last false bounce above the red line and decline to follow the earlier trend down. This was a bear trap. I stepped in it and had purchased some TNA Call Options thinking we were on our way up again as we did before. I was wrong, but luckily didn't buy many. Watch for more of these false moves, as I believe we are in for a steady, but jerky decline. That red trend line shows that we could still reach back up to the 11,000 level, but as the slope of that red line indicates it will be short lived.

So with European debt rising quickly and many countries unable to pay their debt, we are facing country defaults, not just company defaults. Think of Lehman Bros. when you think of market reaction and multiply that by 10 to see the implication of a country default. I wish and hope it is not so, but one must be prepared for the worse and survive it. Good luck to you. Where do you think we are headed? Comment below if you like. I screen comments only for improper language, so there may be a delay before you see your comment posted here. Thanks!

Historical perspective on the Stock market and what's ahead. (UPDATE #3)

I know many of you are nervous today, quite expectedly, I might add. The downgrading of US Debt by S&P and Italy's debt crisis gives one pause. So please allow me the liberty to say that a major crisis has been expected for the past year. I am going to repost one of my blogs here and then add a CHART SHOWING FRIDAY'S CLOSE at the end with some additional comments. Here's what I posted October 16, 2010:

"I have been thinking about this post for a while. It was triggered by friends who see the stock market in diametrically opposed positions. It appears to look like a Bull versus Bear argument but it's really not. It is the difference between those who use Fundamental Analysis and those who use Technical analysis to make decisions about market direction and trading decisions and whether to Buy, Hold or Sell. In order to get at this problem, I must first explain the difference between both analysis techniques. For that I will use the 4th Edition book by Martin Pring titled, Technical Analysis Explained. It is considered the bible for those interested in Technical Analysis. I will not make this too lengthly, but it is important to lay this foundation before I get into where the market is going to go and why the opposing positions have the positions they do. I will conclude with a number of charts and some support for the idea that while the disparity will continue between these two positions, one position is going to lead the way into the future as it is doing right now behind the scenes.

Ok, here we go. "Technical Analysis in nothing more than a tool", says Martin Pring. But a very good tool I might add. "Technical Analysis is based on the assumption that people will continue to make the same mistakes they have made in the past." According to Investopedia.com, "At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. If the price of a stock trades below its intrinsic value, it's a good investment.

Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts.

So currently the argument, for those using Fundamental Analysis, goes something like this. The S&P 500, based on historic terms is trading at about 21 times trailing price-earnings ratio and therefore is cheap as an investment today. That compares to the historical average of 16.4 since 1881 and is at the top end of the range pre-2000. The S&P 500 is expensive on a long-term basis, but and this is the big but, inexpensive compared to the past ten years. (Source: Prieur du Plessis)

Technical Analysts say, "Look at the charts! We are ready to drop significantly!" What do they base that argument on? A Head and Shoulder chart pattern. Let's take a look at several charts and explanations of the Head and Should pattern from several sources. The first chart shows a Head and Shoulder pattern looking at Oil prices back in time with an explanation on how to read the chart information.

This second chart shows a classic head and Shoulder pattern on a usual uptrend similar to the latest market movement this past few years.

This 3rd chart depicts more closely, the current market trend of the past 20 or so years and how to determine how far it should drop, and shows the neckline to measure the amount of the expected drop.

And the last 2 charts show the Dow and S&P 500 for the past 30 years and the big Head and Shoulder pattern we are starring at as Technical Analysts. It explains why many from this camp are very worried about the future.


One other very important relevant piece of information, High Frequency Trading now controls about 70% of the market volume traded in a single day (Source, 60 Minutes broadcast of Oct. 10th). It has also been determined by the SEC, that the single one day crash on May 6th where the market dropped over 600 points in 15 minutes was caused by the High Frequency trades made. It was caused by an algorithm (a set of rules to be followed in calculations and problem solving by a computer). Since May 6th, the SEC has instituted trading curbs, which stop the trading in any security which drops 10% in a short amount of time. Since the trading curbs have been in place a number of times the market has had to be stopped because of similar algorithms by other firms had glitches. The market is not being run by the individual investor, it is being run right now by computers, which were set up by humans, who tend to repeat the same mistakes, as I stated in the beginning of this piece. This is why I like Technical Analysis. You know we humans are going to panic at some point in the very near future. What will be the trigger is anyone's guess. But I think any rational person would agree we are going to panic and we are all just waiting like deer frozen in the headlights.

It has been painful staying on the short side of this market recently, but it will pass. I wish it weren't so, but I am worried many are going to feel some really bad pain and they are going to say it was unforeseen. The Fed will be the first to use that excuse when it happens. Just watch!"

Now allow me to post a chart of the Dow from Friday and see how this played out as well as where we are now. I want you to look at what really transpired since I had written this post in October. The formation of the right shoulder and my pronouncement was premature. (See the label "Premature Call" on the chart) The shoulder had dropped some but then continued to rise as can be clearly seen to about 12,800 on the Dow. But we have now dropped down to approximately 11,300 and look like we may even test the 11,000 level today or within the next couple of days. This makes the October 2010 post more relevant now, if we indeed completely formed the Right Shoulder and are now headed down to break that neckline. It will take tome for this to happen, as it will happen with sharp drops and rebounds forming a zig-zag pattern, but I strongly believe it will. I was premature in my pronouncements on the decline in October, as I was in the run up in 1999 when I said the market was going to drop and suggested people might want to raise cash then. You know what happened in 2000. That was the Head formation.

I believe this market will start down but may end up before the day is over. So be careful out there.

Please remember one major, important point. That is, no one can time the market! It has as much to do with Social Mood as anything else. This should give you a clue as to what eventually needs to change here in America: Our collective Social Mood! Don't blame any Party for that and don't blame the President. It's all about you and me! Leave a comment if you like. Thanks for coming on this day particularly.

UPDATE: 8:45am PST

The Dow has dropped over 380 points but then came back some, but not less than losing 250 points. European markets also tanked today but the most significant data comes near the close for the DAX, Germany's stock market index. It accelerated its losses at the close and closed down over 4.5% by the close to close below the 6,000 level finally ending at 5.951. That will affect our close today. I now expect our market to accelerate the drop near the close today. It is now possible to go below 11,000 today, even while the G7 and G 20 are trying to assure nervous investors that they will do what necessary to stabilize the markets.

UPDATE 2: 10:33am PST

It appears that we will be testing the 11,000 level before the close today. While the Dow is down 335 points at this hour, that's about a 3% drop, the Nasdaq is down 4% and the Russell is down 5% at this hour. The S&P is also down 4% so far, so you can see the Dow is lagging the drop and if we do close like the other Indexes are currently at, we will break below 11.000, substantially. Of special note is that the volume is very high so far today at 229 Million shares traded with 2 hours still left to go in trading. Now the President speaks with Dow down 400 points.

UPDATE 3: 11:50am PST

After the President spoke the Dow closed down about 385, but in the last hour it has accelerated now to the Dow's new low today of down 605 points so far, which broke below the 11,000 level significantly to 10,839. Volume is now up to 285 Million so far.

The war between Fundamental Analysis and Technical Analysis is being played out in the stock market. What is it telling us now?

I have been thinking about this post for a while. It was triggered by friends who see the stock market in diametrically opposed positions. It appears to look like a Bull versus Bear argument but it's really not. It is the difference between those who use Fundamental Analysis and those who use Technical analysis to make decisions about market direction and trading decisions and whether to Buy, Hold or Sell. In order to get at this problem, I must first explain the difference between both analysis techniques. For that I will use the 4th Edition book by Martin Pring titled, Technical Analysis Explained. It is considered the bible for those interested in Technical Analysis. I will not make this too lengthly, but it is important to lay this foundation before I get into where the market is going to go and why the opposing positions have the positions they do. I will conclude with a number of charts and some support for the idea that while the disparity will continue between these two positions, one position is going to lead the way into the future as it is doing right now behind the scenes.

Ok, here we go. "Technical Analysis in nothing more than a tool", says Martin Pring. But a very good tool I might add. "Technical Analysis is based on the assumption that people will continue to make the same mistakes they have made in the past." According to Investopedia.com, "At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. If the price of a stock trades below its intrinsic value, it's a good investment.

Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts.

So currently the argument, for those using Fundamental Analysis, goes something like this. The S&P 500, based on historic terms is trading at about 21 times trailing price-earnings ratio and therefore is cheap as an investment today. That compares to the historical average of 16.4 since 1881 and is at the top end of the range pre-2000. The S&P 500 is expensive on a long-term basis, but and this is the big but, inexpensive compared to the past ten years. (Source: Prieur du Plessis)

Technical Analysts say, "Look at the charts! We are ready to drop significantly!" What do they base that argument on? A Head and Shoulder chart pattern. Let's take a look at several charts and explanations of the Head and Should pattern from several sources. The first chart shows a Head and Shoulder pattern looking at Oil prices back in time with an explanation on how to read the chart information.

This second chart shows a classic head and Shoulder pattern on a usual uptrend similar to the latest market movement this past few years.

This 3rd chart depicts more closely, the current market trend of the past 20 or so years and how to determine how far it should drop, and shows the neckline to measure the amount of the expected drop.

And the last 2 charts show the Dow and S&P 500 for the past 30 years and the big Head and Shoulder pattern we are starring at as Technical Analysts. It explains why many from this camp are very worried about the future.


One other very important relevant piece of information, High Frequency Trading now controls about 70% of the market volume traded in a single day (Source, 60 Minutes broadcast of Oct. 10th). It has also been determined by the SEC, that the single one day crash on May 6th where the market dropped over 600 points in 15 minutes was caused by the High Frequency trades made. It was caused by an algorithm (a set of rules to be followed in calculations and problem solving by a computer). Since May 6th, the SEC has instituted trading curbs, which stop the trading in any security which drops 10% in a short amount of time. Since the trading curbs have been in place a number of times the market has had to be stopped because of similar algorithms by other firms had glitches. The market is not being run by the individual investor, it is being run right now by computers, which were set up by humans, who tend to repeat the same mistakes, as I stated in the beginning of this piece. This is why I like Technical Analysis. You know we humans are going to panic at some point in the very near future. What will be the trigger is anyone's guess. But I think any rational person would agree we are going to panic and we are all just waiting like deer frozen in the headlights.

It has been painful staying on the short side of this market recently, but it will pass. I wish it weren't so, but I am worried many are going to feel some really bad pain and they are going to say it was unforeseen. The Fed will be the first to use that excuse when it happens. Just watch!

Market comments for Oct. 13th

September Import and Export prices were disclosed a minute ago. Import prices fell -0.6% while Export prices went up +0.3%. In August Import prices were +0.5% while Export prices were up +0.3%. The Futures market has the Dow up about 80 points this morning even before the news. After the news the Dow futures dropped a bit and is now up 68 points.

I was looking at the charts and noticed that the S&P 500 still has room to go up. It is my guess that it could go as high as 1250 before the reversal of the trend comes in to play. It closed yesterday at 1169, so that could still yield a 7% gain form here. Then it will be downhill, as the final head and shoulder pattern of this indicator has been formed. So it appears the conditions are ripe for the final phase of this Bear market rally is about to end. Most likely the timing will be after the election but it could start to unfold even before that. There will be a 3 month period where even if the Democrats lose the majority in the House of Representatives that it would be in Republicans interest to drive the market down while Democrats are still in control. The Republicans could then show how they came in and saved the day in January, when they are sworn in to their new seats, replacing Democrats and Speaker Pelosi. The only problem with this picture is that when the big boys start to sell there is no one to buy the stocks because all will be doing the same thing.

The Dow is within 180 points of the 11,200 level where I said that I had thought the top of this rally was. This is close to the 52 week high of the Dow which went to 11,258 previously.

I got a chart last night from Weiss Research and it was very interesting as you can see below. The number of Bulls is now close to extreme which is often an indicator of a trend reversal is in order. We shall see if this plays out as predicted.

Also of significance today is that Apple stock, symbol AAPL, went over $300/share and in pre-market is at $301,08, up $2.54/share.

And on a special note I am thrilled, along with the people of Chile, for the successful rescuing of its Miners. God bless them all and I hope for them to manage the psychological aftermath now with al the attention they will get. Chile did this rescue right!

Where is the market headed?

The markets have behaved much as I expected. Many are now getting a bit nervous, frustrated and a tad of panic. The 2 Month charts of the Dow above are worth looking at again. One chart is current of the market right now at 7:00am PST. The other was my prediction back over the weekend of what was about to transpire and so I drew Blue lines on the chart as I expected things to play out. So far, spot on! So what does it mean? Well, if you haven't sold any stock yet and are sitting there like a deer in your headlights, you will have another chance to sell before the big drop off happens. When we form the next leg up of the "W" pattern, that is the time to sell into the strength. We may not get over 10,500 so you will need to sell as we are between 10,400 and 10,500 because that's as high as this market is going for a very long time. They say you can't time things. Well this one you can. Good luck on the protection of any profits you have.

This 3rd chart below shows where I think the Dow is ultimately going and it's not a pretty picture. I posted this before on May 7th and was warning about this drop back on April 10th to 14th. Check out those posts too.


It will get real ugly going forward from this next rise up, so play defensive. Consider some longer term Put Options as the market rises on this last leg up. I don't think you will regret it. Talk to your financial advisor and ask him how you can protect and preserve your assets in a major downturn you think might happen and have no tolerance for. Cash is always an option.

May 19, 2010 Dow Chart pattern: Continuing Head and Shoulder pattern

I thought I would put up the latest chart of the Dow with my lines drawn to show the Head and Shoulder or "W" pattern formation so you know how far we are in completing the pattern and what is to be expected in the days ahead. The Blue lines on the chart are what has transpired up to today except that to the right of yesterday's data is how the "W" pattern could be completed. Understand the shape and timing of the rest of the pattern is unknown, but the shape of a "W" is clearly visible.

Today is starting out as a down day, as Futures point to a lower open but also, European country markets are all down at this time by more than 2.0%. Asian markets were down as well by 0.5% by the Nikkei to as much as 2.5% in Singapore Straits Times. For a clearer picture of market direction the next few days, watch the volume today to see if it is equal or greater than yesterday's Volume and how the price action goes, up or down. My bet is market will continue to go down this week and then rally up the beginning of next week before a bigger selloff in early June.

The VIX closed at 33 yesterday but I expect a spike between today and Friday of up to 40 again. The Put to Call ratio during the day yesterday stayed between the range of 0.87 and 1.02, which is not at the extremes of recent daily movement. I would expect this ratio to spike at the time of the reversal of the current drop. Without this spike, I wouldn't believe the move up in the market as the Bulls are wishing for, would be real. It would be more likely a pause in the down trend and not a return to the Bull rally of the past year.

New data out this morning for CPI was not good for Gold investors as the Core CPI for April was -0.1%, making this the 4th consecutive month of either zero or a negative number. This indicator clearly shows we are in a deflationary period. There is no real inflation and in my view this means no real recovery. Inflation will come in due time, but until the economy truly recovers, don't look for inflation. This makes the Gold trade look stupid right now as it is very speculative that inflation is about to rear its ugly head. I don't know how long the current Gold hype will continue but as soon as many recognize we are in a deflationary period, we will have a major selloff in Gold.

Market summary for May 18th: Continuation of the decline.

The Dow wiped out an early gain of 90 points from this morning to close down 115 points. The VIX (Volatility Index) rose again 8% today, closing at 33.31. As I look at the candlestick pattern at the close today, the Dow did not close at the lows of 10,482 and therefore it is possible that tomorrow could be another down day. Why do I say that? Well, it's because I believe we are in the process of forming a "W" pattern, often referred to a head and shoulder pattern. And since I believe we are in the completion of Wave B and forming Wave C now, as part of a Super Grand Cycle going back 30 years, I expect this leg down of the "W" pattern to be lower than the 10,400 previous low close thus setting up a slanted down "W" pattern and more down pressure to come. The chart above is from Investopdia and they are a great source of information and reference material. It is not a current chart of any market Index but rather posted to show what a pattern looks like. On another point, the Volume today was higher than yesterday's, making the drop more real.

I was asked today if I see, as many analysts on TV proclaim, that the economy is doing great and this is the time to buy the stocks cheaper as there is more upside to come in this market before a correction. I do not agree with that position. When I listen to their advocacy of that position they say things like, "I can feel it in my gut". They don't present any rationale other than this week's action and last are because Options Expiration is Friday. You can't argue with that. It is a fact Options will expire for May on Friday, but just because Options are expiring doesn't mean the market could just as easily be pushing up to newer highs from the recovery. The arguments are weak for that viewpoint.

On the other side of the argument, there are valid models such as Elliott Wave Theory, that put all the data into perspective and are predictive. And one needs to look at every claim in light of the smell test for reality. Yes, the economy is better than it was a year ago, but not by much. Unemployment rates have stayed pretty constant the past 6 months or so, at very high levels. If the market drops significantly and scares business leaders again, they will downsize their employees again.

If you know where things might go, you are more prepared than keeping your head in the sand. I offer several critical pieces of data to show you habits are changing for Americans. The first piece of data is of the U.S. Savings rate amongst Americans. If things are going so well, why are so many paying off debt and increasing savings if they believe everything is getting better. It was the American Consumer who kept this economy going and contributed 70% of the economy. They are changing habits as is evidenced in the chart above, which shows Americans Saving vs. Japan's. Americans have started to change the trend of spending and are now starting to save. This chart covers the period of 1980 to 2008 where in 2008 the Savings rate was about 4.8%. In 2009, the Savings Rate hit a high of 5.0%. This is a good thing. Unfortunately, it now stands at a little over 3%, as Americans become complacent and believe they hype by both the Fed's Bernanke and Administration officials. They're not. It reminds me of that movie "A Few Good Men" where Tom Cruise character was questioning Jack Nicholson's character and Nicholson yells, "You can't handle the truth!" That's what's going on here. They don't believe we can handle the truth and are hoping if they can just convince us everything is Hunky dory.

My friends, you must be tired of me saying this but I do because I get new readers every day and many of them. For my repeat visitors I apologize. It's just someone has to shout Fire once in a while when they see smoke and know the flames are right behind it.