The Hindenburg Omen, which proponents claim foretells a major market collapse, is back, but fear not, history shows this indicator is full of hot air.» Read More
Starting September 2008 the Shanghai Composite Index has been steadily rising, a remarkable performance in this dismal environment.
First, the SCI stopped falling – a feat which Western markets have yet to emulate. Secondly, it's developed a consistent sideways trading pattern which is a signal of consolidation. The Shanghai market is entering the Year of the Ox, and it may well be the start of a bull year.
Earlier this week, a reader of my India market newsletter asked if I could analyze Satyam Computer Services. I prepared these notes on Monday (5th January) based on the weekly and the daily chart. On Thursday morning, I returned from Beijing to find the same stock was front page news. These are the notes prepared three days before the breaking news.
The stampede out of equities has driven investors towards safe haven assets such as the Japanese yen -- a currency that has risen sharply this year as its appeal grows whenever risk appetite wanes. With the financial crisis expected to intensify, analysts are now expecting further support for the low-yielding yen. Just how much higher can it go against the U.S. dollar?
It's the season of joy and goodwill. Except, there isn't much joy to be found amidst our gloomy economic situation. Will Santa arrive? Will he deliver a personal U.S. Treasury-funded bailout? Will it be a Madoff doll or brand new GM Chevy SUV? Will investors buy into the promise of future delivery based on credit earned for good behavior?
The American Big Three—General Motors, Ford, Chrysler— have followed a steady trend downhill. GM and Ford's stock prices have deflated like a punctured tire. However it looks as if Congress will pump back some air into the Big Three through an emergency rescue package.
Toyota is a different story.
Unlike the U.S. automakers, which show a ski slope trend line, Toyota's ADR chart is dominated by a head and shoulder pattern . These are reliable chart patterns that set achievable downside targets. The weekly chart shows a well developed head and shoulder pattern. The distance between the neckline and the head of the pattern is measured. This value is projected down to set the downside target. Toyota achieved this $55.00 target.
So what next? The answer is provided by the behavior of other stocks and indices which are further advanced in this pattern development. In these market conditions, the head and shoulder pattern targets have been exceeded by around 18 percent. Apply this average to Toyota and it suggests a $45.00 downside target. This potential is further confirmed because the $55.00 level is not an established historical support level.
The common pattern of behavior following this extra dip below the head and shoulder pattern target level is the development of a fast rebound rally. This is then followed by a retracement and another rebound. This activity develops a symmetrical triangle pattern. This is a pattern of indecision. We have indicated on the chart where this pattern could potentially develop.
The symmetrical triangle pattern shows there is still strong selling pressure. This pressure is defined by the down trend line. As the price rises, existing stockholders sell into the market. This selling -- desperately chasing falling prices to capture a small profit -- sets the downtrend line.
The uptrend line is a buyers line. Buyers wait for prices to fall and when the bargain price is irresistible, they re-enter the market as buyers. The up sloping trend line shows some buyers are becoming more optimistic. They are not prepared to let the price fall as low as in the past before they come into the market as buyers. This is a mildly bullish result, so it seems strange to call this combined pattern a pattern of indecision.
As seen in the past few weeks, a news event can trigger a selloff or a rally. In the case of a rally, a leading indication of this is the rise in volume which does not correspond with a rise in price.
This kind of volume increase suggests people are buying in anticipation of some kind of news that will affect the company. There may be rumors in the market. When the news is released the price and volume rise very quickly. This is a short-term trade opportunity. The trade is closed as soon as momentum declines. This may occur one or two days after the news announcement.
In the final installment of a four-part special, looking at the price/volume dynamic, we chart the game of Pass the Parcel. The aim of this game is not to be left holding the stock when the rumor is either confirmed or dismissed in the market.
Volume is the fuel that drives the market. Charts yield clues when volume is out of character. High turnover on a lower close indicates selling pressure -- people want to get out and no one is eager to buy, so the price falls. High volume on a stronger close indicates buying pressure -- people want to get in, but nobody is willing to sell, so buyers must bid higher.
In the third installment of a four-part special that looks into the price/volume dynamic, Charting Asia delves into volume activity reflecting a fast moving rally that, if traded correctly, can deliver good short-term profits for low risk before the rally retreats or moves sideways.
Catch That Rally!
Rally behavior is important as it's often the beginning of a change in the trend from down to up. Unfortunately many people think every rally is the beginning of a new uptrend.
A rally provides a five to ten day trading opportunity and must be managed with a tight stop loss. The way volume increases with price, separates a genuine rally from a skilful example of price manipulation in a 'pump and dump ' scheme. It also tells the trader when there's a 'dead cat' bounce. These are the rules.
Market volume is very significant in short-term trading. The relationship between price and volume provides a guide to the type of buying or selling activity that is developing. Charting Asia presents the second installment of a four-part special that looks into the price/volume dynamic.
In the last column, we looked at the trading game of Pump & Dump . This edition looks at the trading game of Hide and Seek.
Hide and Seek is when an investor tries to build a large position in a stock without causing the price to rise. Basically, this kind of volume activity is the genuine accumulation of a stock for long-term holdings.
Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.