To Enter the Market, or Not -- Charting Indecision
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?
It’s a time of indecision and this is reflected in the developing chart patterns in many of the major Asian regional indices. Just because a market has stopped falling does not mean a recovery is imminent. A market fall must first consolidate and then develop a pattern of recovery or trend reversal.
Consolidation patterns include saucers, rounding bottoms, or extended periods of sideways movement where the index hovers near a support level. The pressure is upwards, even though it might not be immediately successful. None of these patterns are developing in regional Asian indexes.
Markets started 2008 with the confirmation of long-term head and shoulder chart patterns. These reliable chart patterns provided downside targets. This year, markets have exceeded these targets on average by around 18 percent.
Let's use Singapore's Straits Times Index (STI) as an example.
With the STI, the target level was near 2,350. This target was achieved in October. The STI fell further than this, plunging to 1,450 before developing a recovery. It is this pattern of rally and retreat that points the way to indecision.
The most common pattern is a symmetrical triangle. The pattern is created when two equally valid, but contradictory, trend lines can be plotted on the chart.
We're all hoping for a recovery, so let's look at the uptrend line on the weekly chart. It starts from the low near 1,450 and follows the series of rising lows shown with rising trend line. It's a classic trend line showing that buyers are more aggressively moving into the market.
Buyers wait for falling price and when the bargain price is irresistible, they re-enter the market. The upward sloping trend line shows some buyers are becoming more optimistic. They aren't prepared to let the price fall as low as in the past before they come into the market as buyers.
Many stockholders have a different opinion. They are worried prices are going to continue to weaken. They remain sellers in the market. This pressure is defined by the down trend line.
As the price rises, existing stockholders sell into the market. They are desperately chasing falling prices to capture a small profit. Their selling activity sets the downtrend line.
The trend lines define two equally valid, but exactly opposite opinions of the market. The symmetrical triangle captures indecision. Neither seller nor buyer has the upper hand and this makes the market condition exceptionally dangerous.
The probability favoring bulls or bears is evenly balanced. The market can develop an explosive breakout in either direction. This breakout is usually in response to a significant news event.
The symmetrical triangle is used to calculate the target level for the breakouts. The base of the triangle pattern is measured and this value is projected up and down from the apex of the triangle pattern. The upside projection has a target near 2,300. This is near to the strong resistance barrier set by the lower edge of the long term group of averages in the Guppy Multiple Moving Averages (GMMA). This acts as a cap on sustainable trend change.
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The good news is short lived. The GMMA display shows downtrend pressure is very strong. It's going to take more than a short term boost of Christmas cheer to sustain an uptrend.
The downside target is near 1,250. This is a long-term historical support level. It acted as a support in 2003, and a resistance level in 1991 to 1993. It is a logical chart based support level. The chart pattern is used as a warning and traders will use caution over the holiday period.
The apex of the triangle occurs just after December 25 so we should know the nature of the present Santa has delivered.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
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