Is Technical Analysis usefull in todays markets? I believe by all means it is. However, it just a matter of how it is applied and which tools are used. As a recent example last month we identified a resistance level in Silver between 37.00 and 38.00 dollars based on a variety of technical tools. First using simple Fibonacci retracement levels from two different time and price locations we have what is called a confluence of resistance between the 37.35 to the 37.95 area. Secondly, I used simple trend line analysis that projected Silver could hit that line near the 37.00 level. Thirdly I used one of my favorite bearish candle patterns, the Red Opening Marabozu formation. Generally speaking markets will come back to test the midpoint of the real body (opening-closing range) and this can act as a resistance level. And lastly using past price action to determine the seasonal supply and demand functions was very useful. Take a look at figure 1 below which is a weekly silver chart. Point “A” shows the midpoint of the red opening Marabozu candle’s real body (opening-closing range) acted as a resistance level. At point “B” which is what I targeted last months resistance level, see how the Fibonacci .618% retracement level intersected that price area as well. At the lower quadrant of the chart you will see the seasonal aspect for Silver is to typically peak out in late February, in addition, the rally from the beginning of February to the high of 37.58 was on a decline in volume, or bearish divergence in relationship to the On Balance Volume Indicator. The issue is the decline occurred in one day and did not give traders much time to adapt to the volatility. At the least using the analysis would have given a trader the idea not to buy at the 37.00- 38.00 level.
Now we enter March, the last month of the first quarter. From a seasonal aspect we have many shifts in prices among a spectrum of markets. First let’s take a look at the top markets performnace from a year to date basis as shown in Figure 2. The S&P 500 is up 7.4%, the NASDAQ 100 is up 12.8%, Gold is up 7.37%, Crude Oil is up 5.2%, the Euro is up 1.69%, and the 30 Year Treasury Bonds are down 1.67%. It is not a mystery that, as goes crude Oil so does the Stock Market. A look at these performance charts shows traders are shedding bonds and buying stocks. In addition, Gold is also experiencing a correction, or is it liquidation as invetsors have a risk –on apetite for stocks? Performance charts can help confirm seasonal tendencies as well as reveal if there is asset reallocation , or sector rotation as analysts state. As you can see there is a link between these marekt realtionships. Just look at the verticle line which shows these markets performnce on February 29th. Both precious metals and Bonds fell sharply, crude oil and stocks rallied.
The Billion dollar question is: will Emini S&P’s continue higher into the End of March? Before I give my outlook based on my analysis let me state this is one of the most confusing stock market conditions I have seen in quite a while. Examine the chart in Figure 3, we see bearish divergence in the S&P 500 Advance-Decline line and in the On-Balance Volume indicator. Typically we see a Mid February break, as covered in the Commodity Traders Almanac (page 140), however unlike the Seasonal analysis in Silver which shows weakness, this event did not unfold for the Stock market. In effect we had counter seasonal strength combined with a huge cost increase in fossil fuel prices. We did see some sectors decline like Transportation & small caps as represented by the Russell 2000 (TF). But the indexes continued to close on their highs, demonstrating strength.
Meanwhile technicians and traders all lined up looking for a correction that failed to materialize. Since the October lows most stock Indexs have gained well over 20% . The Dow is up 22%, The NASDAQ was up 27% and the S&P 500 is up anbout 25%. In fact just looking at the year to date gains for the NASDAQ 100, 12% averages out to 6% per month. In my experience I believe this performance will be unsustainable for a third month.
Here is my take, the old addage applies, “tops take longer to form than bottoms”, we need to see more participation in several sectors, and the market internals are pointing towards the fact that a correction is actually underway. Since February 20th (8 trading days) when the March Emini S&P’s closed at 1366.50, we have actually closed lower five times. The highest close was 1374.5 on March 1st. the fact that the market has not sen a signifiacnt decline only feels like it has ralliedover this period of time.
The 1370-1380 level in the S&P’s is presenting a wall of resistance that I am not sure we can break out of unless we see several changes in the fundamental picture. Increase in higher-end paying jobs, not temporary seasonal retail jobs. Housing values need to increase more than 1% year over year, and we absolutely need to wipe the slate on foreclosure home inventories, not to mention commercial real estate needs to improve as well. I would also like to see manufacturing jobs return to a higher percent or ratio to the employment figures. We also need a reduction in our deficit spending and lastly an ease in energy prices.
While the economy has improved, it has come with a cost, higher energy prices. This is not a positive situation, especially since we just entered a seasonally stong period. I could not imagine what the price level of crude could get to if tensions escalate in the middle east. I am not sure the market has priced this “black swan event” into the market. But I might add that owning Put options for April Expiration in the Emini S&P’s and going long the oil sector would be a the best play.
If all remains calm in the Middle East, and Oil is up as an indication of a stronger global economy rather than unreast and supply shortages then I am still siding with the seasonal aspect that the stock market will see a correction in March. Therefre let me reiterate, I do expect a correction to materialize, as I see profit taking to occur before the end of March. My downside targets is 1295 -1318 level. That equates to roughly a 4 to 5 percent correction. In addtion, that price level corresponds with the Monthly Persons Pivot support level at 1318.50 basis the March contract. As shown in figure 4.
All the best,
Founder of Personsplanet.com
Investment Education & Advisory Services
Co-Editor The Commodity Traders Almanac