Stock Indexes are rising to their tops
Welcome to 2014! And now we have started the new year, I thought I would post my thoughts on what I expect for stock indexes this year. I am working from these facts, as I see them:
We are in a bear market rally that topped in 2000 (the high in the Real Dow).
Bullish sentiment and herding is at record levels and major tops are always put in here
The debt being used to finance share purchases is also at record levels – the leverage is gigantic and historic
Several indexes are in their final fifth waves up, and some are at their upper tramline resistance
When the bear market resumes, the rate of the falls will be historic and will coincide with a rapid deflation of leverage and a massive dollar rally
Here are my weekly charts with their tramlines and note the positions of my PPPs:
DOW
My lower tramline connects the two major lows from 2011 and 2012 which gives me confidence in the upper tramline as a solid line of resistance.
Here is the daily during 2013 showing the complete (or near) five waves up:
When the slide gets truly under way, my main target is the w4 low which actually meets the lower tramline in the 14,800 – 15,000 area. Also note the hugely overbought momentum here which to me indicates the major top is days away.
S&P
A very similar picture but I have earlier PPPs to add even more confidence to my tramlines.
NASDAQ
This tech-heavy index has been the arena of choice for the speculative binge and its chart is quite a bit different from the Dow and S&P:
I have no PPP on any tramline, which makes them slightly less reliable, but with the many touch points on the lower line, my confidence is restored! In the last week, it has poked above the tramline. This is the moment of truth because often in strong rallies, we see an overshoot in a final exhaustion rally climax that convinces everyone the rally is for real. If the market can quickly get back underneath the tramline, that would confirm the top.
That covers the USA. How about Europe?
GERMAN DAX
With the German economy by far the strongest in Europe in 2013, it is no suprise that the stock market has performed well. But without the QE leverage enjoyed by the US indexes, the DAX is somewhat less vulnerable to the forthcoming de-leveraging:
The market too is overstretched as it trades above my upper tramline. Note the A-B-C form to the rally off the 2009 low.
FRANCE CAC
France is now the sick man of Europe and the stock market is reflecting that:
The index has only just made it to the 50% Fibonacci retrace from the 2007 high – and in a clear A-B-C form. With the five waves down off that high and the A-B-C rally, this is a textbook setup for a short trade. And the height of wA is equal to that of wC here – a common Fibonacci relationship.
This index is the canary on the eurozone mine and will lead the way down.
FTSE
It is back to topline resistance in the 6,800 area.
Bullish sentiment in UK stocks and the economy is about as extreme as I can remember with the pundits falling over themselves recommending sectors to invest in this year. What could possibly go wrong?
GOLD – A Trade for 2014
Late yesterday, the market made a dash for the $1180 area but met with good buying and zoomed upwards like a scalded cat. To me, this has the hallmarks of a selling exhaustion climax:
I now have a good tramline pair on the hourly and yesterday, both tramlines were hit with the $1182 low being followed in quick time by the rally to the upper line.
If this low holds, and I believe it will, confirmation of the low will come if/when the market rallies above upper tramline into pink zone in the $1220 area. I expect this to occur soon.
With this potential selling climax in gold, a vigorous rally from here should coincide with the buying climax in shares, which will travel in the opposite direction.
A Happy New Year!
