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

Year end summary of the Dow and stock market trends

This is my year end summary of the stock markets for the year and where I think what might occur in 2012. My first chart below is of thew Dow for the past 10 years on a monthly basis. As you can see below, for 2011 the Dow managed to stay between 11,000 and 12,800. Looking at the big drop in 2009, where we went all the way down to 7,000 on a monthly basis and 6440 as a low daily close.

It is interesting to notice the Volume chart for the Dow. We averaged about 600 Billion shares a month from 2002 to mid 2009. Since then we have had a significant drop to 380 Billion shares. So the rise from 7,000 was built on significantly less volume than the rise from 2002 to 2009, which was a Bull market rally. It looks to me that since 2009 we have been in a Bear Market rally, as the volume has been too low for a true Bull rally.

The key to watch on this Dow chart are the 2 red lines. We will need a breakout either to the upside or to the downside to determine longer term trends from this chart alone. However, looking at the Dow 25 year monthly chart, we get more clarity, as seen below.

I do still expect a drop below current levels during 2012. The Head and Shoulder patters or "W" pattern as I call it does point to lower lows going forward and limited upside potential.

Given the chart readings, the next thing to do is see if world events suggest a more optimistic or pessimistic view for 2012. We have a Presidential year election in November 2012 and we have had gridlock in the Congress in 2011. I don't see the gridlock easing and many issues including our own debt which must be dealt with as well as continually funding the government. The Unemployment scene isn't going to get much better because we have structural unemployment which will be around for a long time unless somehow we retrain workers in new skills to meet a more technological demand than typical blue collar workers have brought to the work environment. We also have the Supreme Court making a decision on President Obama's Health care bill legislation as to whether it is Constitutional or not.

Then we have the Sovereign Debt issues in Europe, the Arab Spring and new leadership in North Korea, a test of the government of Iraq to function without our military presence and then there is Iran's pursuit of Nuclear weapons. The Euro is in crisis and Russians are challenging Putin's grasp of the presidency there. And last but not least, we have all those who believe the world will end on Dec 21st 2012 because of the Mayan predictions.

Let's conclude with the fact that 2012 will have many volatility swings ands most likely testing the previous extremes of those swings. It is a year to be cautious with your financial assets. My belief is that we humans will do almost anything to avoid pain rather than to risk succeeding. Therefore, I believe it is wiser to be on that side of the investment strategy by being short from time to time. It is also wise to take profits sooner rather than being greedy and waiting for more profit before selling.

Good luck this coming year. Thanks for taking the time to visit my Blog. This new year marks 7 years of my blogging. I have had 79,000 visitors to my site in that period. Happy New Year!

Market comments for Oct. 7th, 2011

The Unemployment Rate stayed steady at 9.1% for September, as reported this morning. Non-Farm payrolls came in better than expected with a gain of 103,000 new jobs created. And on Thursday morning, Initial Jobless Claims came in at 401K for the week of 10/1.

This morning I have included several charts showing that while there is much volatility, there also is a pattern to the moves. AS you can see from the charts below, we are forming lower highs and new lower lows in this market. Will this continue? It's anybody's guess. I guess it will and while todays market looks tired with the recent gains, we may have put in the highs and are headed lower.


Also today I am posting from the Chart of the Day, which shows how slow this recovery has been compared to other recoveries.

"Today's chart puts the latest data into perspective by comparing nonfarm payrolls following the end of the latest economic recession (i.e. the Great Recession -- solid red line) to that of the prior recession (i.e. 2001 recession -- dashed gold line) to that of the average post-recession from 1954-2000 (dashed blue line). As today's chart illustrates, the current jobs recovery is much weaker than the average jobs recovery that follows the end of a recession. Today's chart also illustrates that the current jobs recovery has been slightly stronger than what occurred following the recession of 2001. However, the already modest upward trend has slowed significantly over the past five months."

Stock market direction? Nothing has really changed!

Since the beginning of August, when the stock market had its big drop based upon the announcement of the Fed that they were going to keep Interest rates low until 2013, nothing much has really changed. We have been in a tight range that does't feel so tight because of the high volatility. One week we are just below 11,000, wondering if we are going to hold support here or go lower and the next we are back up to 11,500 wondering if we can break much above this apparent resistance level. It has been worrisome for most investors but not for day traders. The best day traders are making some money, but the rest of us watch in disbelief.

I have compiled some 1 year charts below to reiterate and reenforce previous posts where I said we are in a tight range but now we are closer to a breakout, one direction or another. I have stated many times I believe this direction is lower, so no sense repeating much more than that.

This week Germany's Lower House of Parliament approved increasing the proposed EFSF (European Financial Stability Facility) expanding the euro-area rescue fund's fire power to stem the region's debt crisis. To read more about this Fund and the politics in Germany over this issue, click here. This seemed to move their stock market higher but as the week progressed you can see in the charts below, it pulled back.




You can see I have drawn red lines showing support levels and Blue lines showing resistance levels. You will also note that since the drop in August we have stayed below the 50 day moving average consistently. This line might be a good indicator to track market direction so that you are not fooled as we many during the Bear Trap so noted on a number of charts by the blue circle covering their mistaken purchases. Use these charts as a reminder of where we are and above all remember the Fed doesn't think we are going to get better until at least 2013!

This coming week on Friday, we will get the Unemployment rate for September. This could move markets. Also on Monday be watching for the ISM Index at 10:am EST or 7:00am PST. Expectations are for a reading of 50.5 and the previous month the number was 50.6. I expect the number to come in at 50.0 or less, given the lack of business activity there was in September. Earnings also will be front and center now for the next 4 weeks. You will be hearing about "beating expectations" by companies. Remember, these predictions were lowered last time so that beating these expectations should not be difficult.

Market comments for Sept. 20, 2011

Today I have a series of 3 charts to show you, but before I do a little explanation and commentary. Over the past several months now our US market has been in a relatively tight range of between 11,500 and 11,000. It has been a stated fact by many analysts that the US market is following the European markets due to the concern of a default of Greece. Even as recently as this past weekend, there was news that the governments bailing out Greece wanted to extract some guarantees that Greece was serious and they wanted to see Greece promise to layoff about 100,000 government workers. So that is the backdrop story.

I have put together a chart of Germany's DAX Index, France's CAC 40 Index and the Dow. All are 1 year in duration as of the close yesterday. First the charts and then the commentary.



As you can see from the charts above, Germany and France's Indexes are still apparently going lower and the Dow and other US Indexes seem to be not following the most recent trend as show by my red lines. To me I interpret this to mean that 2 scenarios are possible, First and to me the most likely scenario is that any more of a drop by these European markets may result in a sharper drop by the Dow. The other scenario is that we will disconnect from these European markets and stay within our tight range until our own economic results determine our separate direction. Much depends right now on the politics of the negotiations by Congress over the next few months and to whether the joint committee will be able to agree on spending cuts and revenue increases. However, be forewarned that Europe is really driving our markets and we could be setting up an alarming drop as many are not prepared for the market to go lower. I was at a party on Sunday afternoon where someone who was talking about the market stated that all indicators he has been watching have flashed a Bull market rally is about to begin. I told him I didn't know what he was watching but I think we are firmly in a Bear market and we are going much lower.

Stock market trend: Where we're headed

I have a series of charts this morning, but a little different than previous charts in that each are Weekly charts instead of the usual Daily charts. The value in these charts are that it takes out some of the noise and daily volatility, which makes it more difficult to discern trends.

The charts below, with the exception of the German DAX are all weekly charts covering the past year time period. You will notice there are 100 Day & 200 Day Moving Averages on the US Charts. Oh and if you look at World stock market charts, they appear basically the same.





This last chart below is a Dow 5 year chart and I have drawn many lines showing various support and resistance lines. You can see that for our current time period I have drawn the same slanting downtrend, but now there is a larger context to see this timeframe and possible key levels which will either confirm we continue to drop or we have broken above resistance. For those who are believing we are going to go up from here, pay attention to the red line which crosses at 10,500 on the right axis. If we break below that, we go to the 10,000 level. Also see the red line which crosses at 11,500. That is the tiny box which defines either a rally or a major decline.


I think you get the idea now. The trend is down, we have not really gone much above the lows and it looks as though we are going lower in the weeks ahead. If you doubt that, then buy stocks and Call Options. There will be many willing to sell you their stocks.

Market outlook for July 9th

Hi all. Well the market is in a tight range today. The Intraday shows the Dow keeps bouncing around the unchanged line only briefly going negative. Volume is extremely low, as many appear headed out for the weekend early. I guess I should too. But wanted to give my readers a heads up, as I am traveling starting tomorrow until next Thursday. I will do some posting if events warrant but it will be less frequently until I return to home base.

Remember the overall trend is still down and that if you take a good look at a 2 or 3 month chart, you will see we are forming another "W" pattern and it is slanted lower. Happy summer.

Markets and politics rule the week. Whipsaw action in both

It has been a while since I have commented about the overall market. This has been because nothing much was different in the trend until now. We are currently at a very interesting point on both the Dow and the S&P 500, as the 2 charts above show. We have broken the uptrend line this past week and reverted back just to the critical 3 year downtrend line. If we go below this downtrend line we are headed dramatically lower and could finally have that major 20% correction. However, if we can stay above that line, we may avoid it, at least for now.

We have gone back to the previous, ever important, resistance level of 1090 on the S&P 500 when markets closed lower on both Thursday and Friday. Back in early December, December 5th to be exact, I had said that I expected the correction to begin the end of January into the first 2 weeks in February and we are just about there now. The next 2 weeks will determine where the market is headed for 2010. If you have been following the markets recently, when good news has been the leading story of the day, like how much GDP gained in the 4th quarter, the market did not stay up. And when the market seems to have some bad news, the market has a big selloff on higher volume. The market is prepared to go lower psychologically right now and it may just play out.

The political arena has also added to the volatility when the seat Ted Kennedy held went to a Republican and shook Democrats to their core. They were in disarray. But then the State of the Union speech given by President Obama had many feeling a sigh of relief that it was a great speech which boosted the Democrats morale. Yesterday, President Obama went into the mouth of the beast, being invited to a retreat by House and Senate Republicans, he took them up on their invitation but insisted that the event be televised. Republicans agreed and so it began with a brief introduction and then down to business. The President gave the Republicans a lesson in being honest with constituents and the American people, in an unscripted format. His command of facts was truly impressive and inspirational. The contrast between this President and President Bush couldn't be more striking. One commentator reported one Republican leader as saying that they should never have agreed to have the event televised because the President did so well and making Republican arguments look so empty of substance. Fox news even decided to cut away and trash the President rather than allow their viewers to hear the President answering Republican questions in a masterful way. WE need more of this type dialogue in our politics no mater what side of the debate you are on. It forces competency to rule rather than quick shots from either party. Independents had to like this format and discussion more than both Parties. I hope we see more of it. Stay tuned!

Put to Call ratio as a market Indicator

This morning I was doing some research and had a discovery that I wanted to share with my readers. It has to do with stock market indicators I track daily and what they mean to me. I am always open to hear other points of view on the same data so have at it if you like. The one I chose to focus on today was the much touted Put to Call ratio. Simply put, it is a ratio of the trading volume of put options to call options. It is used to gauge investor sentiment. For example, a high volume of puts compared to calls indicates a bearish sentiment in the market. I use the extremes of this indicator to help me determine market turning points and whether I should buy or sell stocks. In looking at the Put to Call ratio from 2004 to 2009, I discovered some interesting facts. First looking at the chart above, I have selected the most extreme values on the Index and plotted them as they occur over time on the Dow chart. You can see that most of the extreme point showed Bearish trends for most of 2007 and 2008, with the exception of a few low data extreme points such as 0.57 and 0.66. Most of the signals said to sell. You might want to double click on the chart to see it larger on a separate page.

The number of times the Put to Call ratio was at the highs of between 1.2 and 1.7 was 135 times out of 1400 data points. That's 9.6% of the time the sentiment was very pessimistic (Bearish). Interestingly, of those 135 times, here's the number of times by year:

2004 9
2005 9
2006 20
2007 33
2008 36
2009 0 (so far)

Here's a breakdown of these 36 signals by month for 2008
Jan 5
Feb 2
Mar 9
April 2
May 0
June 1
July 2
Aug 0
Sept 5
Oct 7
Nov 3
Dec 0

Remember it was Oct. 2008 that had the big drop from a Dow of 11,000 to about 7,800. The Put to Call ratio was screaming in March warning us of an impending drop in the market.

The number of times the Put to Call ratio was at the lows of between 0.69 to as low as 0.32, was 88 times out of 1400 data points. That's 6.3% of the time the sentiment was very optimistic (Bullish). Again, interestingly, of those 88 times, here's the number of times by year:

2004 51
2005 13
2006 15
2007 2
2008 0*
2009 6

* Notice that there were 0 Bullish signals in 2008 and also notice that for only the first 4 months of 2009 there has been 6 Bullish signals. It may be we are in line for about 18 for the year at this rate.

Here's what the Dow did in each of those years starting with the first number the opening price in January and the second number the December ending.

2004 10,425 10,800
2005 10,800 10,796
2006 10,796 12,500
2007 12,500 13,264
2008 13,264 8,483
2009 8,483 8,574 Closing price on May 8th

It is clear from the above data that there were many signals to sell and prevent the loss of capital by watching this Put to Call Indicator. The difficulty with using any single indicator to make a market decision is that you don't know if you are in a transition period within that indicator or not. So using the highs and lows as determination points can be misleading and costly, as I can tell you first hand. I don't use a single indicator, but try to use several. I happen to like this one but trends are more important as you can see from the above data, than isolated data points.

If any of you were recipients of my Newsletter and can remember back in 2000, I had used the indicator at its extreme to tell my readers I was going into 100% cash at that time because the extreme reading on the Put to Call ratio was at the most Bullish signal at 0.30. That extreme value of Bullishness could be a great tool to find a turning point while everyone is buying and selling into the rally. Conversely, when the Put to call ratio was at the extreme pessimistic value after 9/11, I used it to Buy back into the market, as did many others. So the take away is this from the Put to Call ratio, when the numbers start showing consistently a high or low value, believe the trend. If the numbers are staying low, it is a bullish sign and the market should rally. If the numbers are pointing higher, it is a bearish sign and the market will drop. However at both extremes they will reverse that trend.

Lately the market is signaling a Bullish, not bearish trend with the Put to Call closing on Friday at 0.86 and it has been as low os 0.65 recently (May 5th). We are close to testing this rally as we approach the 200 day Moving averages for the Dow and S&P 500. We have gone over the 200 day Moving average on the Nasdaq this past week but retreated below it. This next week is an important week. If I just use the Put to Call ratio as an indicator, it says the market will go higher. But if I consider the 200 day Moving average it gives me pause and has been the reason I have not sold my ETF Ultra Short, TZA. It has been painful to hold on to the shares given the big drop from about $31-$36/share purchase price to the close yesterday at $25/share. Luckily, my shares of other stocks like BCON rose significantly lately to minimize the paper loss. Here's an excerpt from the Dynamic Wealth Report on the 200 day Moving average from Feb 23rd, 2009 and is applicable today:

The 200-day moving average is still trending downward. This tells me to hold off. It’s not yet time to jump back into the markets. This is not the time to buy & hold… not yet. Believe me, I’m watching this indicator closely.

Once we start trending higher, it’ll be time to get reinvested in the markets - in a big way. Until then, continue hedging your positions… buy stocks very selectively, and stick to the strength of the markets. If you do decide to take positions, make them small… it’s a traders market right now.

One other piece of data I am watching is Insider trading. Insider Selling dollars amounts dominate the Buying and has for many months. If things are really go up a lot, someone should tell the Insiders, because they don't seem to think so!
Good luck this week. Don't forget to vote for May on my Mini Poll as to when you believe the recession will end.