What is the most significant chart today? It’s a question asked by CNBC Asia “Squawk Box” anchor, Martin Soong a few days ago because the American market recovery seems to have stalled.
The key question revolves around the ability of the U.S. market to continue this slow recovery. Despite last week’s retreat, the Dow index chart suggests the recovery is sustainable. Another important market indicator suggests the recovery is very sustainable.
The Dow index developed a head and shoulder pattern between April 2011 and July 2011. The neckline for this pattern is extended into the future. The Dow index is oscillating around the value of this upward trend line. There are no end-of-upward trend patterns developing. The upward momentum is not strong but it is persistent.
An essential feature of the U.S. economy is the size of consumer credit. The 2008 recession shows American consumer shift from using credit cards to financing their consumption using cash. Cash came out of the stock market. Cash was used to pay off credit cards and debt.
This action was taken by millions of individuals with the result that consumption and demand plummeted. When consumers stop spending, the economy stalls.
There are many official methods for tracking the growth of the retail credit markets. Reports about what has happened in the past are not as useful as methods for understanding what people expect to happen in the future.
The U.S. market is dominated by three large credit card providers. They are Visa , MasterCardand American Express . Their business is the business of providing a line of revolving credit to their customers.
The price chart of Visa shows that investors expect that this use of credit cards will continue to grow. Starting in September 2011 the Visa stock price has lifted from around $75 to $125. This is a 66 percent increase. That’s a useful investment return.
More importantly the trend rise has been very steady. This is a smooth rising trend with a low level of volatility. There are no large price range days that deliver false exit signals in the rising trend. The smoothness of the upward trend shows strong investor confidence in the future expansion of personal credit use in the U.S. It is this increase in credit that signals an increase in confidence in the U.S. market.
The chart of the Visa stock price points the way to the future intentions of the U.S. consumer and they are bullish. This suggests that the Dow will recover momentum because this increase in personal credit demand will drive up consumption. For investors, the dips in the Dow trend are a long term buying opportunity.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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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