The recent rally is in many ways comparable to the June 2011 rally. The technical setup has turned out to be very, very similar. The probabilities that markets will be chased higher on news this week does seem to be elevated, but this will almost certainly set up a magnificent shorting opportunity on a par with the July 2011 highs. So far we have seen "sell the news" reactions on the Spain banking bailout and Greece elections news and there is a good possibility we will see the same this week on bumps driven by G20 and Fed meeting news. So we may be very close to the top of this rally and an abrupt resumption of the downtrend may ensue at any time.
In the face of the news events, it's important to keep perspective. Markets do not rise or fall based on election results or any other kind of news event. Nor do they move because of the actions or potential actions of monetary and fiscal authorities. Any of these can have only a short to intermediate term influence on market prices. Ultimately market prices move based on supply and demand. If there is more supply of stock than buying power to absorb it, prices will fall. My analysis tells me that is the condition we have at this juncture. Like June 2011, there can be a short term rally, but when the supply/demand equation is heavily tilted to the supply side such rallies are selling opportunities. Yes, under these circumstances intervention and news can create volatility that would not otherwise have occurred. In the final analysis this will be properly priced into the markets as well. The current market rise may very likely be the final rally before the main body of the bear market begins. And there is some chance that the rally is over already and the next leg down is set to begin.
I. Bear Market Began in Q1 2011
Global asset markets have been in a major bear phase since the first quarter of 2011. The higher 2012 highs in Dow and S&P 500 were unconfirmed by any other market. At this time, many global markets are far closer to taking out their 2011 lows than they are to making new 2012 highs, with some within reach of 2009 lows. There was a technical top in February 2011 which also corresponded with some initial price tops, followed by other waves of price tops in May and July 2011. Secondary highs were registered in March and April 2012 with only certain US indices making new highs. While there is overwhelming evidence that risk assets are 16 months into a bear market, there is virtually no recognition of this. Instead, broad market psychology assumes that the Fed and global monetary authorities will "reflate" asset prices in much the same way as was seen in 2010 and 2011. The gap between the reality that the markets are in a qualitatively different condition at this time and the ability of monetary magic to affect the situation is a classic setup for a significant market failure.
1) FEBRUARY 2011 TECHNICAL TOP
The technical top occurred in February 2011 as most technical indicators made their peaks. Here's are some examples:
a) Technical Indicator Divergences
RSI, MACD, Stochastics and ADX are perhaps the most commonly used indicators. All of them made weekly highs at the February 2011 SPX top and subsequently diverged from market price at the May and July 2011 market highs as well as at the 2012 top. It's quite interesting or even alarming that unanimous confirmation of the most common of technical signals given by the most commonly used indicators has gone completely unrecognized. I guess we're all too busy waiting for Greece election results to notice. Note the very poor responsiveness of the indicators during the recent rally...
Need some help staying on the right side of the markets? Join the BullBear Traders room at TheBullBear.com. You'll get this kind of timely, incisive, unbiased stock and financial market trading, timing, forecasting and investment technical analysis and commentary daily. It's free to join, no credit card is required and if you like my work you just make a donation at the end of each month.
Keeping You on the Right Side of the Market
PLEASE CONSIDER MAKING A DONATION TO SUPPORT MY WORK USING THE PAYPAL LINK BELOW. THANK YOU!