Tuesday, April 20, 2010

Where's the Next Fire?

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It is often said that an event "out of left field" or that "no one could have seen coming" creates the move in market prices that makes it hard to trade. But the technical analyst believes that looking at charts gives one a warning of a potential trend change long before the news item that makes it obvious is released to the public. How is this possible?

The cynic (realist?) would say it is because the "big money" and/or "insider money" starts buying or selling before the news becomes public and is simply engaged in a type of insider trading. The more optimistic or Elliott Wave analyst would say that the act of buying and selling that creates the trend change, regardless of why, creates the news to "explain" the tape as the market "sees" the future through the collective trading wisdom of its participants.

It doesn't matter why, really, but I am one who believes that charts do contain significant predictive value. However, I never trade a chart "purely" without believing in or understanding the fundamentals behind it. For better or worse, I can't bring myself to ignore the fundamentals, even though I know that short and even lengthy intermediate-term moves in markets are COMPLETELY UNRELATED to the fundamentals. This is why I wasn't the person screaming to buy financial stocks around the time of the March 2009 panic lows (oops...).

I mention these things so that you understand my bias in reporting what a chart has to say. My bias is going to be bullish on Gold charts because I know the long-term trend and fundamentals for Gold are as good as it gets in the world of investing, so it is just a case of buying on dips and selling on overbought rallies if trading is of interest.

With the "regular" economy I am bearish and I am also bearish on general equities. After having my bear suit shredded and danced upon by raging bulls during 2009, I temporarily gave up shorting general equities last fall. However, I will be an actively trading bear again in general equities and I am biding my time for the right opportunities to get short general stocks again. Right now, things don't look that bearish in global markets overall to me. Having said this, I think another leg down in the stock market is coming, I just don't know when.

When looking at multiple global stock indices, two stood out as particularly bearish in orientation to me. That doesn't mean these charts are going to collapse any second, but I would look for a piece of bad news "out of left field" to be able to blow these charts a long way down without much effort.

First up, a 16 month daily chart of the Shanghai Stock Exchange ($SSEC):

Second, the Italian Stock Market (16 month daily chart of the $INE follows):

I'm sticking exclusively with the "long Gold and Gold stocks" for now, as I continue to think we are on the threshold of a big move higher in the Gold patch (patience is not one of my virtues). The global stock market party continues for now, but you don't want to be a bag holder in general equities when the tide turns.

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