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The Invisible Charts

Excerpted from the most recent BullBear Weekend Report.

Currently I am seeing well defined technical formations across a variety of markets which appear to be invisible to the overwhelming majority of market participants. There appears to be a massive blind spot arising from the current predominant market psychology. This divergence creates a potential opportunity for traders and investors.


INVISIBLE CHART #1: S&P 500

SPX shows a reverse head and shoulders formation (here using SPY as a proxy):

S&P500

While we have all heard of the "massive head and shoulders top" on SPX that has potentially formed over the last year, this very well defined and so far SUCCESSFUL reversal pattern has gone virtually unrecognized. The supposed topping formation was bolstered in late August by the much ballyhooed "Death Cross" (note: no serious analyst calls it a "death cross"; it is referred to as a "bear cross") which left behind a clear bear trap as the cross marked the bottom. Meanwhile, have we heard a peep about a "Triple Super Nova Mega Mondo Birth Cross"? Nope. Not a single click on a keyboard as a week later the 20 EMA and the 50 EMA simultaneously crossed the 200 EMA in a rising market leading to the head and shoulders neckline breakout. TOTALLY INVISIBLE and hugely bullish technical market action made all the more bullish by its invisibility.


INVISIBLE CHART #2: NASDAQ 100

NASDAQ 100

Technology stocks have recouped 80% of their losses from the 2007 high and 80% of the losses from the April 2010 high. The weekly and monthly EMAs are all rising in bullish alignment with price trading above them all. Meanwhile, weekly and monthly RSI are not yet overbought and have room to run on the upside. I turned bullish in late 2008-early 2009 as tech stocks did not make a lower low with the SPX creating a bullish divergence. Do we hear any noise about a long term bull market in technology stocks? Nothing but the sound of crickets chirping!


INVISIBLE CHART #3: COMMODITIES

Reuters-CRB Commodities Index

Commodities are showing clearly bullish wave structure and in the early stages of a wave 3 advance. Better than 70% of the losses from the 2007 highs have been recouped and EMAs on monthly, weekly and daily charts are in bullish alignment and rising with price trading well above them all. Some deflation! The world economy must have no prospects for growth at all with such obviously declining demand for commodity inputs! Heard much clamor about this chart? Hardly.


INVISIBLE CHART #4: BASIC MATERIALS

Basic Materials

Basic Materials sector has broken its downtrend from the 2007 high, recouped nearly 100% of losses from the April 2010 high and nearly 62% of losses from the 2007 high. EMAs on all time frames are in bullish alignment and rising. If future economic prospects are so very terrible, why are the stocks of companies which produce basic materials leading the rally in equities? Not many market analysts or pundits are asking these questions. Seems worthy of at least some attention!


INVISIBLE CHART #5: GOLD

Gold

The long term weekly chart of gold shows a well defined rising wedge pattern in the latter stages of completion. A view of the entire bull market in gold shows that this rising wedge, which has formed over the last 2 years, comes in the Wave 5 position, which makes it an ending diagonal. The fifth wave of this fifth wave is itself working out to be an ending diagonal pattern. There are lower highs in RSI on the weekly and monthly charts--divergences typical of a fifth wave diagonal pattern. The reverse head and shoulders that formed the 2008 bottom has a measured move target at the upper rail of the pattern at 1338. Successful upside breakouts from this confluence of technical occurrences are rare and would only coincide with an extended 5th wave which would probably only occur in the context of a real hyperinflationary scenario and a total breakdown in the US Dollar. OK, sure it could happen. But isn't this technical setup worth at least a footnote somewhere? The fact that it is being totally ignored in favor of wild speculation about massive Quantitative Easing by the Fed, dollar collapse scenarios (heard that one before?) and Argentinian style inflation is at least cause for some concern and maybe a little bit of a red flag for this market. And the fact that there is a reading of zero percent worry over the downside potential here is a classic reversal setup.

(10/08/10 UPDATE: After an exhaustion move above the upper rail of the wedge and past the head and shoulders target of 1338 to a high of 1365, there was a sharp intraday reversal back to the wedge where support was found. An ABC sideways consolidation above the breakout may be in progress, in which case we are looking at a 5th wave extension (which itself can be extended) and a parabolic blowoff move similar to the 2008 crude oil market. If the upper rail does not hold and price fails back to the lower rail of the formation then we are probably looking at a major top in progress. I'm actually leaning towards the more bullish scenario at this time.)


So what can we derive from the apparent invisibility of normally reliable technical conditions across a variety of key markets? I tend to give the market the benefit of the doubt. If the chart appears to be saying something and broad market opinion is running contrary to it then I will have to take that as a potential opportunity. There may be a significant divergence between market sentiment and market reality and there may be big profit potential when the gap between perception and reality closes. Having said that, one must also be aware of the possibility that the chart interpretation is faulty and also on guard for the failure of even the most reliable of technical setups. For example, a weekly close in gold above the upper boundary of the rising wedge would probably signal a parabolic Wave 5 extension which would probably mean that some kind of dislocating US Dollar/Hyperinflationary episode is in progress.

Disclosure: Long SPX, Long DAG, Long JJG

 

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