7 Chart Points That Will Show Us Direction

In 2013 the DJIA gained ~3,500 points and closed the year at All Time Highs…but then lost more than 1/3 of those gains as 2014 began. Was the January sell-off an early warning sign of a Bear Market…or just another “buy the dip” opportunity? Was it a Sea Change in Market Psychology…a KEY TURN DATE across a number of markets…or just another correction in a major bull market? Well, it’s too early to say…but we’ve identified some key chart points that will give us a clear answer to that very important question…very soon!

In late 2013 I wrote that Market Psychology was WAY TOO bullish…but I had to respect one of my favourite trading questions, “Are you trading the market the way it is or the way you think it should be?”  In early January I felt a break was imminent and throughout the month I cautioned against “buying the dip.” So what now…is the price action of the last three days a dead cat bounce…or a resumption of the multi-year Bull Market?

There has certainly been a Big Bull Market in stocks since the 2009 low…with the last leg up beginning in November 2012 when the market figured out that Abe was going to win the election and implement the Japanese version of “whatever it takes” to end two decades of deflation in Japan. A strong long-lasting Bull Market creates tremendous self-perpetuating momentum…and while the Bears may say that the emperor has no clothes they need to respect that momentum…and wait…and then wait some more…before going short.

But Market Psychology clearly changed in January…and not just in the major stock markets…almost all currencies fell against the US Dollar with some currencies (Argentina, Venezuela, Ukraine, Russia, South Africa…) falling hard…copper fell ~7%, gold rallied ~8% off three year lows, and the US Treasury market had a strong rally…while junk tumbled.

When markets are confident risk assets are bid aggressively higher…when markets are over-confident risk assets are bid recklessly higher. When Market Psychology turns bearish the risk assets which had been bid most aggressively higher fall the hardest. Capital “runs away” from risk and “seeks” safety. Capital flows from the periphery to the center.

When markets are confident leverage is used to buy risk assets. When markets are over-confident TOO MUCH leverage is used to buy risk assets. When Market Psychology turns bearish leverage is reduced…voluntarily, or otherwise and prices fall. ( See this month’s Investment Outlook by Bill Gross)

The bearish Market Psychology in January was in stark contrast to the bullish enthusiasm at the end of 2013. That dramatic change in sentiment may have created a KEY TURN DATE (KTD) in January…a date that signifies a Major change in Market Psychology across a number of markets…which would mean that the January price action is only the beginning of a much bigger move.

However…in the past few days bullish Market Psychology has come storming back…by Friday’s close the DJIA had gained ~460 points from Wednesday’s lows. I’m watching the market action very closely…if this latest rally runs out of gas and rolls over…the classic “dead cat bounce”…and the market takes out the last week’s lows…then I’d expect selling to become aggressive.

But…we can’t forget that there has been a powerful long term rally in the major equity markets…huge momentum has been created…the “buy the dip” trading style has been repeatedly rewarded…I don’t expect the Bulls to give up without a fight! If this “bounce back” carries the market to new All Time Highs then Bears Beware! Long Live the Bull Market!

S&P 500 Weekly: It was curious that the stock market couldn’t make new highs in January given the very bullish Market Psychology in December. The trend line off the Abe November 2012 lows (the last leg up in the bull market that began 2009) has held…so far. If the bounce of the last few days peters out and prices turn lower I’d expect sellers to get aggressive if the market trades through last week’s lows. On the other hand…if the market can rally and make new highs after this break if off to the races!  

The Japanese Nikkei Index – Weekly:  From November 2012 to December 2013 the Japanese stock market was one of the “hottest” in the world (courtesy of the BOJ!) In December it barely took out the highs made in  May 2013…and then turned down the last week of the year. At last week’s lows it had fallen ~15% from its December highs…compared to the 6% decline in the S+P (When Market Psychology turns bearish the risk assets which had been bid most aggressively higher fall the hardest.)

Argentina Peso – Monthly: (number of Pesos required to buy one US Dollar):  This is what a currency looks like when people lose confidence…oh, and this is the “official” rate…the black market looks a lot worse!

Comex Copper – Weekly: A couple of weeks ago I wrote that the “false breakout” above the $3.40 support/resistance line could see copper break out of its range in the opposite direction…possibly through $3.00.

The Canadian Dollar – Weekly: The CAD bear market accelerated in January and hit a low of 89 cents for the first time since July 2009. A bounce after such a steep fall seems reasonable…but currency trends often go WAY FURTHER than what seems possible…I remain negative.

Comex Gold – Weekly: The “Double Bottom” is hard to miss…but will it hold? Gold hit 3 year lows in December and then rallied nearly $100 to the January highs. I’ve maintained that it needs to convincingly take out the $1275 level before I’d think about being a buyer. It has done much better against the stock market than against the US Dollar.

The CBOT 10 Year Treasury Bond – Weekly:  The yield on the 10 year bond hit 2 ½ year highs near 3% in late December. It seemed that “everyone” was calling for higher yields in 2014. I wrote that I expected bonds to rally with a break in the stock market…that the rally might set up a great opportunity to short bonds…but wait for it! 

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