Macbeth asks the three witches to, "look into the seeds of time, and say which grain will grow, and which will not".
Four centuries later he could be asking the same question about a recovery from the global financial crisis. Are the green shoots of growth about to be nipped in the bud, or will they be smothered by fast growing Chinese bamboo shoots? Chart analysis provides one method to assess the viability of the green shoots and bamboo shoots.
The key point of analysis is the character and the nature of the trend. The character of the trend relates to the volatility of index behavior. Is the trend stable, or is it dominated by waves of increasing volatility? The nature of the trend examines the structure of the trend reversal and its foundations.
Green shoots are planted in American soil and we use the broader S&P 500 index to assess the growth. We start with the nature of the trend change and observe some weakness in the foundation. The trend reversal did not start from a solid support area near 800. The rebound starts from near 660. This was a minor resistance area in 1996, so it seems unusual for it to act as a significant rebound support area in 2009.
The long term downtrend line has been broken but the index is now moving back to this level and using it as a support point. It’s a slippery downwards slope that may provide an unsure footing for a strong rebound.
The most significant resistance area is near 1,060 and until this area is overcome the trend is treated with caution.
The character of the trend is defined with the (GMMA) display. The most important feature is the behavior of the red long term GMMA. The degree of separation indicates the strength of investor support for the developing trend. The expansion has been slow to develop. In the short term, traders look for a convincing rebound from the long term GMMA and a move above 960. This emerging trend cannot be convincingly defined with an uptrend line. This makes it difficult to decide which pullback signals an uptrend failure, and which is consistent with a continuation of the uptrend.
These green shoots need intensive care and sustained nurturing before they develop good strength.
Bamboo shoots are planted in Chinese soil and the Shanghai Composite's 70 percent march towards 3,000 is very different from the behavior of the S&P. This trend has a more vigorous and robust character.
The downtrend was tested and retested several times in late 2008 before a successful breakout developed. The breakout has then successfully tested and retested the new uptrend three times in 2009. In each case the long term GMMA has absorbed the sell-off and provided a foundation for a strong rebound. The long term GMMA did not compress and it showed increasing investor support for the developing trend. The long term GMMA quickly moved to a broad and consistent separation.
The nature of the trend development is also more secure. This is a step and stairway pattern with a smooth progression between support and resistance levels. The trend reversal developed from a well established historical support and resistance level.
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Although not shown on this chart, the breakout developed from a series of fan trend lines. This is a pattern associated with long term and sustainable trend change. The foundation nature of this trend change is different to the nature of the trend change with the S&P 500.
These bamboo shoots are a better example of sustainable trend recovery. They include features which need to develop in the S&P 500 before we can say with confidence that the green shoots will survive.
Macbeth asked a difficult question and the answer from the witches was elliptical. The answers from these charts are more clear cut.
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