By Brandon Wendell, Online Trading Academy Senior Instructor and Trader Mentor
At the beginning of 2009, how many of us could have predicted such a bullish gain in the broad markets? The big question on everyone's mind now is, are we done with the recession? What does 2010 have in store for us? We have all heard the headlines on how the economic recovery is in progress and that the bear market is over, but can we believe the same voices that told us in early 2008 that the US would not be going into recession?
The best we can do is to rely on the charts and our risk management to determine where and how to place our money. Looking at the weekly chart of the S&P 500, I would like to point out some similarities from the last market bottom after the tech bubble crash. You can see from the chart that both inverted head and shoulders lasted exactly 33 weeks. They both had a negative divergence on the momentum indicator MACD and were followed by a crossover of the 40 and 80 week simple moving averages. The moving average crossover is significant as it typically delineates the change from a bull to bear market and vice versa.
Figure 1 For as similar as the two bottoms are, they also have major differences. The recent rise in price has been marked with a much more severe negative divergence. We may be getting too far ahead of ourselves. The MACD is much more overbought than the rise from the 2003 lows, as well. We have heard the pundits speak of the need for a correction in this market and the evidence is overwhelming that it should occur soon. The Santa Clause Rally we have experienced that broke the indexes to new highs was on low volume and not sustainable.
The US Dollar moves with, not opposite, the equity markets in a normal, healthy market environment. We have been experiencing a deflationary recession which causes the markets to act abnormally and also makes rallies like the current one difficult to sustain. Looking at the US Dollar, we completed the measured move from the double-top and also held major support going back to 2008. With the recent rally and breakout of the downtrend channel, the Dollar is back. Should the equity markets follow the Dollar's rise? I would be more inclined to believe the bull is back.
Figure 2 Even the bonds are being sold as the need for safety has diminished and risk appetite has increased.
Figure 3 Time will tell if the bull is back. I am watching the signs carefully and will participate when it is prudent to do so. Watch for the signs and always remember to practice proper risk management and you can thrive in any market condition. May you all have a prosperous new year!
- Brandon Wendell bwendell@tradingacademy.com
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