Will dollar strength continue? It's a question most effectively answered with chart analysis of the dollar Index.» Read More
The Dow developed a pattern usually associated with an uptrend ending, suggesting traders should sell short. The S&P and Nasdaq, meanwhile, have just showed a pullback in the context of a strong uptrend. A pullback is associated with a buying opportunity on the long side.
This is a two-to-one vote in favor of a pullback and rebound so traders waited for evidence of the rebound before entering new long positions — and a new rebound pattern has emerged and been confirmed on the S&P 500.
The downside target for oil near $38 was almost achieved in the week of August 29 with a low of $38.24. But there are signs of hope for higher prices.
But the rebound rally from $38.24 was fast and strong, which suggests the downward pressure in oil is weakening. Traders are now alert for the development of patterns that signal the end of the downtrend.
There are three significant levels on the weekly chart; support resistance levels near $58, $48 and $38. A sustained move below $38 has a downside target near $28 but there is a low probability price will move below $38.
Instead, the pattern of price development that started around March 2015 has the potential to develop into a inverted head and shoulder pattern. This type of pattern is a reliable indication of a change in the direction of the trend. The chart pattern development is best seen on a weekly chart.
The price activity for this pattern is currently developing and the full pattern might not be completed for several weeks. Most key, when the pattern is not confirmed, we should use this analysis with caution.
When it comes to earthmoving, Cats are iconic.
The yellow Caterpillar brand continues to dominate earthmoving project works throughout the world. When I was building roads 35 years ago Caterpillar was the plant equipment of choice. It remains so now which is why the decline in the Caterpillar price from $105 to around $65 is significant in more ways than just for Caterpillar shareholders.
Caterpillar is the perfect proxy for the infrastructure build required to sustain the world economy. When economies are booming, Caterpillar is climbing. The sustained fall in Caterpillar prices indicates a sustained fall in infrastructure investment. This is not just greenfield investment in new infrastructure, road, and mining projects. It's also a decline in brownfields investment in the renewal of ageing infrastructure.
The key support level for Caterpillar is near $77. Early in 2015 this was a support level. In July the price slipped below support and then staged a weak recovery in August. After that the story is all on the downside.
The VIX, or CBOE Volatility Index, is often called the fear index, and it's an apt description but often for all the wrong reasons.
The VIX is a very useful guide to the expectation of significant change in the market. There are times, such as on September 14, when the source of the fear can be easily identified. The rapid decline in the VIX was a clear message that Janet Yellen would not raise interest rates at the FOMC meeting, and I made that call on on CNBC's Street Signs.
Readers have asked since why I forecast the Fed's decision not to hike with such confidence. The answer is, it starts with strong understanding of the VIX.
Technically it's a popular measure of the implied volatility of S&P 500 index options. The VIX is calculated by the Chicago Board Options Exchange (CBOE) and represents a measure of the market's expectation of stock market volatility over the mext 30-day period.
It's been called Doctor Copper because the metal is not just fundamental to the creation of electricity, and thus daily life, but because it's long been used as an indicator of global economic health.
And the weekly copper chart, shown here in cents per pound, suggests the world's economic health is not good.
The dominant feature on the chart is the equilateral triangle pattern. This pattern forms where there is a balance of buyers and sellers and no clear direction. It's a pattern of indecision but when the market finally makes a break, the pattern is used to establish the upside or downside targets.
The downtrend trend line in the pattern starts in September 2011. The uptrend line starts October 2011. The result of these two valid but opposite-direction trend lines is the equilateral triangle pattern.
The height of the pattern is measured from the base. This value is then projected downwards from the point at which the price moved below the uptrend line in March 2013. This gives a downside target of $2.50. It took a very long time for the copper price to reach this target and this reflects a slow but steady slowdown in global economic growth.
It's been relentlessly talked down by Reserve Bank of Australia Governor Glenn Stevens. It's been smashed by a sustained run of low commodity prices. And, with perverse glee, it's fall has been hailed as a sign of success even it's a prime marker of a collapsing economy.
The Aussie did its best to cling onto the narrow shelf of support near $0.78 but once that failed it has been a rapid plunge into the valley of death. This is great news for those who have traded short but it begs the question: How much longer they should stay short? The weekly chart provides some (un)pleasant answers.
The chart has two dominant features. The first is the prolonged, steady downtrend that is well defined using a Guppy Multiple Moving Average (GMMA) indicator. The fall below $0.93 in September 2014 was an accelerated continuation of the downtrend. The long-term GMMA group of averages rapidly expanded showing sustained, consistent selling pressure.
You want evidence of the deleterious impact of high frequency trading and ETFs? Then look no further than the 1,000-point move on the Dow on Monday; that's 1,000 points down, followed by a rapid 1,000-point rise.
For several years I've noted the way this trading has fundamentally changed the operation of markets. Markets do not collapse without warning.
True, weaning the U.S. market off a diet of cheap money is proving more difficult than expected; this agonizing hike-no hike seesaw makes the earlier taper tantrum look like a storm in a tea cup. And the implied slowing in Chinese growth has highlighted the weakness in U.S. growth and its dependence in China for American prosperity.
But there are usually warning signals of a severe market downturn. In 2007 the Dow, the S&P 500 and the NASDAQ all developed end-of-uptrend patterns of behavior that technicians could read. That meant that the subsequent market fall was not a real surprise, although the degree of the fall was less expected.
Hans Christian Andersen wrote cautionary fairy tales, some of which, like "Little Red Riding Hood", are used to frighten small children.
Some commentators latch onto market fairy tales and use them to frighten ill-informed investors. The Death Cross is part of this evil fairy tale vocabulary.
The Death Cross sounds suitably terrifying and ominous, but its signals are not reliable and the market is riddled with false Death Cross signals where the index has rebounded and continued the uptrend. The Hang Seng showed false Death Cross signals in 2014, 2013, 2012 and 2010. In the Dow, the signals are false in around 60 percent of recent occurrences.
Anybody who actually uses the Death Cross and its benign cousin, the Golden Cross, to make investment decisions can lose substantial money. Of course for the ill-informed those losses just prove that technical analysis doesn't work so they deride more sophisticated applications of technical analysis as akin to reading the tea leaves.
The NYMEX oil price breakout above the resistance level near $58 failed to develop into a sustained uptrend.
Instead, the consolidation period saw oil move between $58 and $62. The fall below the new support level near $58 was rapid. The fall also moved quickly below the support level near $48, a rapid collapse of support that is a very bearish sign.
The downside target now is near $38, which will be along-term and sustained support level. This area, a major technical feature in the NYMEX oil chart, acted as support in 2004 and 2008 and as a resistance level in 2000 and 2003.
When oil collapsed from $110 it formed a double-bottom pattern near $45, a pattern that is often associated with a trend reversal.
Gold has dropped below its key support level near $1150, taking it to a new five-and-a-half-year low and setting the next support target near $980.
The historical support level for gold is near $1180 so when the price dropped below this level last November many traders expected the price to continue falling towards the next support level near $980. This did not develop and gold rallied and moved sideways.
Historical support near $1180 failed and a new support level developed near $1115, which created a strong support band between $1180 and $1115.
Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.