Late last year, the US market bottomed on November 16, 2012. Since then it has been powering higher defying all odds. During this time – 196 calendar days or 134 trading days – the index has not had a significant pullback. Before last week’s decline, it had only three shallow pullbacks averaging -3.43% and lasting for an average of nine calendar days.
Between May 22nd and May 31st, S&P 500 has declined -3.35% in nine days. The current S&P500 rally has stayed within a very well defined upward sloping channel.
Previous pullbacks had taken the price to the lower channel limit. At the moment the price is well above it which means that there is more room for it to drop. The chart shows couple of weak support areas – 1) four day consolidation area in early May with a 1623 support level; 2) The last swing high of 1597 made on April 11th; 3) 38.2% & 50% Fibonacci ratios, from the last swing low, at 1626 and 1609 respectively.
Support levels below these two will most likely instigate breach of the trend line.
Last year, from early June to mid-September, too the index had staged a rally within an upward sloping channel without a 5% pullback. At that time the lower channel line was broken on October 11th, almost a month after the high was made on September 14th. Eventually the index bottomed on November 16th with a -8.9% decline in 63 calendar days.
The current rally may remain intact if the lower channel line is not broken – which means that the decline should not go beyond -5.5% in the next couple of days. If the trend line is broken then next major support level is the swing low of 1536 made on April 18th, which is slightly below the 38.2% Fibonacci ratio of the rally. This is in -10% decline range.
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Last week started a volatile period for Nikkei 225. As we noted on May 24th, there are two opposing forces acting on the Japanese economy. One is Abenomics and the other is formed by a combination of fundamental reasons, namely –1) Weak closing of S&P 500 following confusing testimony of Chairman Bernanke; 2) Volatility in the JGB market; and 3) Weak Chinese PMI figures raising concerns about Asian growth.
Abenomics wants the Japanese economy to grow, which means Nikkei 225 needs to rise. The fundamental reasons mentioned above are trying to put a damper on Abenomics if not killing it outright, which means downward pressure for Nikkei 225. Along with these opposing fundamental forces acting on Nikkei, the index is also facing few technical forces that we mentioned in our May24th post.
Since then four more days’ of market action has happened and few things are becoming clearer. One is that the technical resistance – the lower bound of the horizontal channel formed in 90′s – is turning out to be a strong one. Nikkei is finding it difficult to break above it at the moment.
Second is that the busted chart patterns are quite powerful. On December 17, 2012, Nikkei 225 broke above the upper line of a descending triangle (see weekly chart below). Descending triangles are bearish in nature with an anticipated downward break. An upward break makes it a busted chart pattern. The resultant move off this pattern was approximately 187% of the height of the pattern.
The third is that this time the index is showing more signs of a pullback than previous few attempts – this is turning out to be first significant pullback of the rally that started in early November 2012.
Fourth is the emergence of a bearish ABCD pattern.
On May 23rd and May 24th, Nikkei traced the AB leg of the pattern. Then for the next three days it made the BC leg of the pattern. This was only slightly more than the 25% of the down move (AB), which makes it not-a-classic pattern. Today, May 30th, Nikkei has broken below the low of candle that was “C” and also below the low of AB leg. The measured move target – CD = AB – is estimated to take the index to 12550.
In between there are more support levels.
38.2% and 50% Fibonacci ratios create support levels at 13130 and 12261 respectively
A shallow pullback in mid-April created a support at 13004 – the low of April 16th
April 5th was a gap up day – the support created by the upper and lower limit of the gap are at 12831 and 12634 respectively
A shallow pullback occurred in early April too creating a support at 11805 – the low on April 2nd
There are other support zones below these levels too but they will come in play only if some of the higher support zones are broken.
So the technicals have started to make their move. Now the question is who or what will arrest this downward slide. Will it be more ammunition from the Bank of Japan or Abe government, the enablers of Abenomics? or is it driven by profit-taking and will finish when all short term profit-takers are done? Or is it the beginning of something more ominous? Keep in mind that if the index reaches 12750 – a level within some of the above mentioned support zones - then it will enter bear market territory, which is 20% retracement from the high. A 20% drop does not necessarily mean that the downward move will continue but it does increase that likelihood.
US stock market has run through many resistance levels created over the last decade and is at a very high level. Most of the broad market indices are either at all time high or much higher than the pre-financial-crisis level achieved in 2007-2008.
Dow Jones Industrial Averages, S&P 5oo are at all-time highs. So are Dow Transports and Russell 2000. Although, the NASDAQ Composite has not reached the levels seen in 2000, it crossed above high of 2007 in 2012.
Most of the exchanges are also seeing similar high with an exception of the NYSE stock exchange. The Dow Jones US Total Stock Market Index (DWCF) is at an all-time high with a chart pattern similar to S&P 500.
However, NYSE Composite Index – index of all stock traded on the NYSE exchange – has reached only the high achieved in May 2008 and is almost 10% below the all-time high of October 2007.
This indicates that the stocks listed on the NASDAQ are rising faster than the stock listed on the NYSE.
Related Reading:
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After making a new high since December 2007, Nikkei 225 dropped -1,143 point or -7.3% on Thursday. Friday turned out to be no better with a yo-yo move. Though Nikkei gained +128 points, it was far lower than the 500 point gain that the index had intraday.
In two days, the index dropped -6.4% and saw massive volatility. So what’s up with it? Is it the start of a bad phase? Let’s put everything in perspective.
Firstly, Nikkei has been one of the best performing major stock indexes of 2013. As of today, it has been up +40.6% year-to-date. Since November 2012 – approximately seven months ago – it has been up by +63.7%. During this time it has not had any significant pull back. In mid-January 2013, Nikkei saw a pullback of -4.7% in eight trading days. In late March it saw a pullback of -7.2%, again in eight trading days. In mid-April, a three day pullback brought Nikkei down by only -4.7%. The Thursday’s drop is similar to all significant (or insignificant) pull back since the rally started in early November 2012. The only major difference is that this drop happened in one day whereas earlier pullbacks were spread out over 3-8 trading days.
Now there are various reasons of the so called ‘crash’ – profit taking being one of them. There are many pundits and analysts who are coming out with their own rationales. Some are persuasive and some are not.
In fact, Thursday’s Nikkei rout was triggered by weak factory activity data in China, Japan’s second-biggest export market, and on concerns sparked by Fed chief Ben Bernanke‘s suggestion that its bond-buying could be tapered this year.
Yields on 10-year Japanese government bonds have risen to 0.88 percent, nearly triple their April 5 low of 0.315 percent, just after the BOJ introduced its latest easing campaign
The increase in yields is still very small and takes it to only slightly above early 2013 levels. However, along with other reasons, increasing yields could spook the market as mentioned by Nomura’s Jens Nordvig, who gives three reasons for the one-day plunge – 1) weak closing of S&P 500 following confusing testimony of Chairman Bernanke; 2) Volatility in the JGB market; and 3) Weak Chinese PMI figures raising concerns about Asian growth.
On the other side is what will happen if the market continues to fall. Morgan Stanley thinks that in that case Prime Minister Abe and BOJ will most likely double down and deploy additional policy tools to support the economy and Abenomics.
But what are the charts saying?
The monthly chart of Nikkei 225 paints a very interesting picture. After making an all-time high in December 89 – January 90, Nikkei retreated sharply. Then from March 1992 to July 2000, it traded within a horizontal channel bounded by a high of 22,000 and a low of 13,000. It briefly moved back in this channel in late 2005 after breaking the down trend line from 1989 high. The financial crisis of 2008 arrested its move towards the upper limit of the channel and Nikkei fell along with all major world indices. See the monthly chart below.
It then tested the previous low, breaching it slightly before bottoming in 2009. The sharp rise since November 2012 has brought the index back above the lower limit of the horizontal channel of 90′s. Considering the type of resistance this lower limit creates, it is not surprising that the index is finding it tough to breakout.
Since the 1989 high, the 9-period monthly RSI has not spent much time either in the overbought region or in the oversold region. The first entry in the overbought region was cut short by the dotcom-bubble burst of 2000. The second journey was in August 2005 and lasted for about ten months during which time the index saw a decline of 20% from high-to-low before making a divergence in 2007, when the index made a high but the RSI did not. Presently the RSI is still rising and is not near the highs of 2005 or that of 1989 and 1986.
An analysis of weekly chart provides us with some more explanation. From April 2010 to December 2012, Nikkei traversed a descending triangle pattern. Generally it is a bearish chart pattern with a high likelihood of breaking below the lower bound. However, in late December 2012, Nikkei broke above the upper descending line, making it a busted-descending-triangle.
Since then the index has rocketed higher. In the process it blew past the measured-move target of descending triangle. The height of the triangle is approximately 3,200 points and the break-out point is approximately 10,100. The 1-to-1 moved will make a target of 13,300, which the index crossed in April. The 161.2% move makes the target to be 15,258, which the index crossed last week.
Another resistance is created by the 78.6% Fibonacci level of the fall from 2007 to 2009. The third resistance level is created by the high of 16107 made in the early December 2007.
Combining the analysis of monthly and weekly charts, it is natural that the index is facing some serious resistance. Coupled with oher reasons – weakening Chinese numbers, slight uptick in JGB yields, and fears about continuation of QE in the United States – the fact that Nikkei is pulling back is not surprising.
On the other side is the team of BOJ and the Abe Government, which is determined to get Japanese economy out of its prolonged slump. Abenomics has just started to show its result and there is no doubt that Prime Minister Abe and Governor Kuroda of BOJ are going to continue with their policies, which are going to continue propelling the Japanese stock market and weaken its currency.
The net result of these two opposing forces – technical resistance and the support from monetary and fiscal policies – is going to be a turbulent period for Nikkei 225 in the near future.
By reaching a low of 78.915 in the last week of January 2013, the Dollar index made a double bottom – it made the first bottom of 78.725 in early September. The index completed the pattern in late February 2013, by breaking above the intermediate high of 81.515 between the two bottoms made in the second week of November. The up-thrust in the current week of 20th May took the index to a high of 84.59. This is equal to the measured target of the DB pattern. It is also slightly higher that the high of 84.245 made in the week of July 23, 2012. See the weekly chart below.
Dollar Index (Weekly) – May 24, 2013
The measured target of 84.115 and the previous high of 84.245 created two resistance points. The third resistance point is at the Fibonacci levels of the index’s fall from the high of 89.100 made in the week of June 7, 2010 to low of 72.860 made in the week of May 2, 2011. The current level is between the 61.8% and 78.6% Fib levels – near 70.7% retracement.
So it is not surprising that the index is stalling at these levels. Presently it is searching for a reason to continue going up and also looking for s good support. There are few previous highs that may act as a support. On its way down from July 2012 high, the index made and small rally high of 83.61 on August 2, 2012. It tested this high on April 4, 2013 before retreating. Presently the index is at this level. This support was also strengthened during the up-and-down moment of the past few days. If the index breaches this support then there are three levels that may act as a short term support – a) 38.2% Fibonacci level of 83.33 and high of 83.32 made on April 24; b) 50% Fibonacci level of 82.98 ad the low of 83.045 made on May 14; c) 61.8% Fibonacci level of 82.60 and the measured move target of 82.50 from the horizontal congestion zone formed in the last week. See the daily chart below.
Dollar Index (Daily) – May 24, 2013
All of these support levels will come in play if the index breaks below 83.52, the low made on May 22nd. If the index breaks above May 24th high of 84.02 then it may retest the high of 84.59. A break above that high will take it to the 78.6% Fibonacci level of 85.624 on way to the June 7, 2010 high of 89.10.
The U.S. Dollar index is a geometrically average of six currencies weighted against the U.S. dollar. It was created by the Federal Reserve in 1973. The index contains six currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The euro replaced now-defunct five European currencies – the Deutsch Mark, the French franc, the Italian lira, the Dutch guilder and the Belgian franc.
Percentage Weights:
Currency
Weight
Euro (EUR)
0.576
Japanese Yen (JPY)
0.136
British Pound (GBP)
0.119
Canadian Pound (CAD)
0.091
Swedish Krona (SEK)
0.042
Swiss Franc (CHF)
0.036
Before the euro the weightings of five historical currencies were: Deutsch Mark (DEM) = 20.8%; French franc (FRF) = 13.1%; Italian lira (ITL) = 9.0%; Dutch guilder (NLG) = 8.3%; and Belgium franc (BEF) = 6.4%
The formula:
U.S. DX = (50.14348112) X (EUR/USD)-0.576X (USD/JPY)0.136X (GBP/USD)-0.119X (USD/CAD)0.091X (USD/SEK)0.042X (USD/CHF)0.036
In the formula the value of the ‘power’ is positive if the U.S. dollar is the base currency within the pair (JPY, CAD, SEK, and CHF) and the value is negative when it is not (EUR and GBP).
The value of the Dollar index is calculated by Reuters in real time approximately every 15 seconds from a multi-contributor feed of the spot prices.
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EWI senior analyst Jeffrey Kennedy shows you how to identify quality trade setups with supporting technical indicators.
“I always will be an Elliottician, but other technical tools have merit and are indeed worthwhile: they allow me to build a case, build a more confident reason for making a forecast and for taking a trade; making a trading decision.”
-Jeffrey Kennedy
I recently asked Elliott Wave International analyst Jeffrey Kennedy to name his 3 favorite technical tools (besides the Wave Principle). He told me that Japanese candlesticks, RSI, and MACD Indicators are currently his top methods to support trade setups.
In this 3-part series, we will share examples of how to use these 3 tools to “build a case” in the markets you trade. These practical lessons allow you to preview how Jeffrey applies techniques with proven reliability to support his analysis.
We begin this first lesson with a basic candlestick-style price chart.
You may be familiar with an Open-High-Low-Close (OHLC) chart: comprised of vertical lines with small horizontal lines on each side. The top of each vertical line is the high and the bottom is the low. The small horizontal lines on either side represent the open and close for that period.
Here’s an example of a Japanese Candlestick chart:
Japanese candlestick charts employ the same data that OHLC price charts do except that the data is expressed differently. The real body is the range between the open and close, and appears as a small block. Shadows are the lines that extend upward and downward from this block, and represent the highs and lows.
Next, take a look at the chart below.
Two bearish candlestick reversal patterns that Jeffrey finds highly reliable are the Evening Star and the Bearish Engulfing Patterns. This weekly continuation chart for the Canadian Dollar combines a 20-period moving average to show that the trend is down — allowing you to focus on bearish reversal candlestick patterns to spot trading opportunities.
Jeffrey notes that “combining these reversal patterns with moving averages makes them even more dynamic because they focus your attention in the direction of the larger trend.”
Japanese Candlesticks begin our spotlight on Kennedy’s top 3 ancillary tools for trading with the Wave Principle. We’ll share parts two and three via how Kennedy uses RSI and MACD indicators to support his Elliott wave interpretation in coming weeks.
To learn more about these tools now, access our FREE 10-Lesson Trading Series, “How to Apply Some of the Most Powerful Technical Methods
to Your Trading.”You will gain access to an archive of lessons that includes a wealth of information: in-depth guidance and insight on the Elliott Wave Principle and other technical approaches. You’ll learn some of the best technical indicators for analyzing chart patterns, anticipating price action, and spotting high-confidence trade setups.Learn how you can access your free lessons now >>
This article was syndicated by Elliott Wave International and was originally published under the headline Top 3 Technical Tools Part 1: Japanese Candlesticks. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Elliott Wave Simplified"Puts Elliott Wave theory into terms all traders can understand and successfully apply." - Larry Jacobs, TraderWorld.com & Traders World MagazineEllio... Read More >
The Wave PrincipleThe Elliott Wave Principle is a form of technical analysis that some traders use to analyze financial market cycles and forecast market trends by iden... Read More >
The one simple insight that will change the way you invest forever
Some of the greatest problem solvers in history — Albert Einstein, for example — know that the secret to solving complex problems requires simplicity.
Einstein’s simple equation (E = mc²) revolutionized math and science because it offered a single simple solution to so many of the world’s mysteries.
New research from EWI Founder and President Robert Prechter reveals that a relatively small (yet growing) group of investors has discovered a universal truth about investing that stands to revolutionize the fields of finance and economics. Prechter’s insight is simple yet counterintuitive. Here’s a short clip from his recent presentation at a major investment conference.
In the rest of this 23-minute video packed with charts, figures and commentary, Prechter explains:
How the impact of social and financial events like 9/11 and the Enron scandal on stocks is shocking in a different way than you think.
The surprising relationship between interest rates and stocks.
Why oil prices have zero predictive value to stocks.
Inflation and deflation’s impact on hard money.
Central bankers’ supposed power to turn trends.
What new data says about the long-term viability of investment models based on earnings and value.
The secret force that drives the investing decisions of futures traders, investment advisors, money managers, hedge fund managers and economists.
The full 23-minute video is online now and free to Club EWI members.
This article was syndicated by Elliott Wave International and was originally published under the headline (Video) How Market Losers Think – and How to Stop Doing It. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Elliott Wave Simplified"Puts Elliott Wave theory into terms all traders can understand and successfully apply." - Larry Jacobs, TraderWorld.com & Traders World MagazineEllio... Read More >
The Wave PrincipleThe Elliott Wave Principle is a form of technical analysis that some traders use to analyze financial market cycles and forecast market trends by iden... Read More >
Financial historians will eventually describe the past 30 years as a time when investors embraced epic levels of financial risk.
Stock mutual funds are now so popular that they outnumber stocks. Bond, real estate and other types of mutual funds also exploded in number. Many financial instruments — such as derivatives — are so complex that you need an advanced degree in mathematics to grasp how they function.
So in this Great Asset Mania, to sock away money in a cash-equivalent account seems an unlikely way to win the financial race.
But in truth, the tortoise really has outpaced the hare for the past dozen years.
Since 2000, the S&P 500 has registered two plunges of more than 50 percent and several of more than 10 percent, leaving this index slightly lower today than it was 12 years ago.
‘Buy-and-hold investors have little to show for the roller-coaster ups and downs, aside from a nauseous gut,’ says [the chairman of a capital firm].
ABC News, Aug. 2, 2012
It’s true that a Treasury-bill account yields next to nothing. But at this financial juncture, the well-known saying of humorist Will Rogers has never been more relevant: “I am more concerned with the return of my money than the return on my money.”
Robert Prechter says that embracing financial risk because interest rates are low can be a snare.
Because interest rates are ‘too low,’ investors claim that they have ‘no choice’ but to invest in something with more ‘upside potential.’ Ironically but obviously necessarily, the last major interest-rate cycle was perfectly aligned to convince people to do the wrong thing. Two decades ago, when rates were high, people insisted that stocks were not worth buying. Now that rates are low, they insist that cash is not worth holding. It’s a psychological trap keeping investors from doing the right thing: buying stocks at the bottom (when rates were high) and selling them at the top (when rates are low).
Conquer the Crash, second edition,
pp. 161-162
There is a flip side to decades of epic financial risk:
I’m convinced that by the end of this decade people are going to feel even more negative towards stocks than they did in the ’40s. They’ll tell their children and grandchildren not to touch the stock market.
Robert Prechter, June 2010 interview
Get ready for the market changes ahead and start investing independently.
Learn to Think IndependentlyYou’ll get some of the most groundbreaking and eye-opening reports ever published in Elliott Wave International’s 30-year history; you’ll also get new analysis, forecasts and commentary to help you think independently in today’s tumultuous market.
This article was syndicated by Elliott Wave International and was originally published under the headline The Tortoise is About to Cross the Financial Finish Line. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Elliott Wave Simplified"Puts Elliott Wave theory into terms all traders can understand and successfully apply." - Larry Jacobs, TraderWorld.com & Traders World MagazineEllio... Read More >
The Wave PrincipleThe Elliott Wave Principle is a form of technical analysis that some traders use to analyze financial market cycles and forecast market trends by iden... Read More >
The federal government defines the Producer Price Index (PPI) as “the average change over time in the selling prices received by domestic producers for their output.” With help from the Federal Reserve’s massive inflationary policies, the PPI has climbed even as the economy began to fall in 2008-09. All the while, the financial media persisted with stories of an economic recovery. EWI analysts offer an independent perspective.
The New York Times declares, “Economic Gloom Starting to Lift.”
Corporate America, however, is not so sure. This chart of producer prices [wave labels removed] probably illustrates why. After years of largely uninterrupted growth, the Producer Price Index appears to be on the cusp of a critical reversal that should turn into a steady decline in wholesale prices.
The Elliott Wave Financial Forecast, December, 2012
The latest Financial Forecast published Dec. 7, and the latest evidence reinforces the message of the chart’s title. The PPI elevator has already descended to a lower floor.
The Labor Department said its seasonally adjusted producer price index slipped 0.8 percent last month, the second straight decline.
November’s drop in wholesale prices was the sharpest since May.
Reuters, Dec. 13
The Producer Price Index decline is happening in tandem with a notable reversal in consumer sentiment.
The Thomson Reuters/University of Michigan’s preliminary reading of the overall index on consumer sentiment plunged to 74.5 in early December, the lowest level since August.
It was far below November’s figure of 82.7.
Reuters, Dec. 7
The Federal Reserve’s machinations — which includes the Dec. 12 announcement of $45-billion in monthly Treasury bond purchases — will not stave off a developing deflationary trend.
In the second edition of Conquer the Crash (p. 114), Robert Prechter describes what generally happens, depending on the position of the Elliott waves, near the end of the Kondratieff cycle.
Near the end of the cycle, the rates of change in business activity and inflation slip to zero. When they fall below zero, deflation is in force. As liquidity contracts, commodity prices fall more rapidly, and prices for stocks, wages and wholesale and retail goods join in the decline. When deflation ends and prices reach bottom, the cycle begins again.
Can the Fed stop deflation? Should you rely on the government to protect you? Get the answers you need now — free! See below for full details.
8 Chapters of Robert Prechter’s Conquer the Crash — FREEThis free, 42-page report can help you prepare for your financial future. You’ll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more.Get Your FREE 8-Lesson “Conquer the Crash Collection” Now >>
This article was syndicated by Elliott Wave International and was originally published under the headline Two Signs That Deflation is Far From Over. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Elliott Wave Simplified"Puts Elliott Wave theory into terms all traders can understand and successfully apply." - Larry Jacobs, TraderWorld.com & Traders World MagazineEllio... Read More >
The Wave PrincipleThe Elliott Wave Principle is a form of technical analysis that some traders use to analyze financial market cycles and forecast market trends by iden... Read More >
By Elliott Wave International, on March 14th, 2013
Senior Analyst Jeffrey Kennedy shows you how these volatility indicators support pattern recognition
As a technical trader, are you able to view financial market fluctuations clearly and reliably?
At Elliott Wave International, we hold that the Elliott Wave Principle is the most effective tool for analysis. Yet the Wave Principle works well with other technical tools. If you are ready to trade with Elliott, our educational subscription editor Jeffrey Kennedy can teach you how to integrate ancillary technical indicators — such as Bollinger bands — to build high-confidence setups in the markets you trade.
Bollinger bands identify periods of increased and decreased market volatility. Learn about the significance of these fluctuations in this video about Bank of America Corp. (BAC) taken from Jeffrey’s Elliott Wave Junctures service:
Here are Jeffrey’s notes from the lesson:
Bollinger bands form a two-period standard deviation channel based on a 20-period simple moving average. This channel will contain 95% of all price action with the moving average acting as a center line, which often provides support and resistance. The width of the Bollinger bands increases and decreases with market volatility.
Narrow Bollinger bands coincide with low market volatility, which often leads to big price moves. Option traders like this because option prices are low at this time. Conversely, wide bands imply that market volatility is high, which translates into expensive options.
The recent narrowing of the Bollinger bands in BAC signals decreasing volatility. Since periods of low volatility precede periods of high volatility, look for a big move in the days to come.
Learn to Apply Some of the Most Powerful Technical Methods to Your TradingGet more lessons like this in a FREE 10-lesson video series from Elliott Wave International. Analyst Jeffrey Kennedy will show you how to incorporate technical methods into your trading to help you spot high-confidence trade setups. You’ll learn the methods the professional traders use, like Elliott waves, MACD, RSI, candlestick patterns, Fibonacci and more!Access your free lessons now >>
This article was syndicated by Elliott Wave International and was originally published under the headline [Video] Bollinger Band Basics. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Elliott Wave Simplified"Puts Elliott Wave theory into terms all traders can understand and successfully apply." - Larry Jacobs, TraderWorld.com & Traders World MagazineEllio... Read More >
The Reserve Bank of India (RBI) and the Indian Ministry of Finance seem to be at loggerhead. The government is concerned with the slowing growth and is trying to implement growth policies and dropping strong hints to RBI to provide some help.
In its mid-year economic analysis presented in Parliament on Monday, the finance ministry said it expected GDP growth of between 5.7 per cent and 5.9 per cent for the year, which is lower than the 7.6 per cent budgeted but higher than 5.4 per cent achieved in the first half.
This, the government said, meant the growth rate for the second half would be “close to around 6 per cent”, as it made an undisguised pitch to RBI to oblige by cutting rates. “To achieve this, both fiscal and monetary policies, however, would need to be supportive to sustain investor confidence,” the review said.
But, the Reserve Bank of India is displaying its independence and is maintaining that the inflation risks remain. In its December meeting, RBI did not cut the key rates despite various pleas by the industry and government to lower them to spur growth.
The Reserve Bank of India (RBI) on Tuesday kept key policy rates including the cash reserve ratio (CRR) unchanged. While the repo rate was maintained at 8%, CRR was also maintained at status quo of 4.25%
D Subbarao (RBI Chairman) maintained that risks to inflation remain and emphasised the need to shift increasingly towards growth. The RBI hinted at a shift in stance towards pro-growth measures and has lauded the government’s policy initiatives.
Though the industry was clamoring for and expecting a rate, many experts and economists were not. Goldman Sachs was expecting a 25 bps cut. But, some like HDFC are expecting a 50 bps cut by March.
India is facing duel problems for some time. Majority of developed nations are facing threats of deflation and lack of growth. They are also facing high sovereign debt and increasing budget deficit. So they have limited options. Their central banks are cutting rates to spur growth and keep deflation risks at bay without much getting much help from fiscal policies. Many developing nations are also facing slowing growth mostly because of the impact of the lack of growth in the developed economies. Unlike, advanced economies, developing nations are not facing deflation risks and the the inflation is moderate. So they have more options to implement growth oriented monetary and fiscal policies.
India, on the other hand is facing the duel problem of high inflation and slowing growth. Her expected growth of 5.7-to-6 per cent is impressive compared to that of developed nations but not for an emerging economy like India. The wholesale price index (WPI), India’s main inflation gauge is at 7.24 per cent, but it is at a 10 months low. The consumer price index remains at 9.9 per cent. Again, by developed nations’ standard, the inflation is high but based upon India’s situation, inflation is cooling down.
So it is natural that the government and the industry would like to see more growth oriented policies to be implemented. The government is running budget deficits but plans to limit it to 3 per cent of the GDP. This is not very good nut it gives some leeway to implement growth policies. But, the government also needs help from RBI for easy monetary policy. Hence its pleas for rate cuts.
D. Subbarao, the RBI Chairman is a cautious central banker who is more concerned about the threats of inflation than the lack of growth concerns. He is playing safe and keeping rates constant. But, then RBI has a history of doing such things and reacting later than what the industry expects. Here is the main Indian market index performance during RBI’s rate-cut and rate-hike stints.
From October 2004 to July 2008, RBI continuously raised rates in 25 bps increment – reaching a high of 9.00 percent by July 29, 2008. During this time the $SENSEX steadily rose before stalling at the beginning of 2008. At that time the global economies stumbled and SENSEX followed suit but RBI reacted ten months later in October.
Federal Reserve started to cut rate in the fall of 2007 but RBI started to cut rates only from October 29, 2008. It steadily cut rates till April 2009 before stopping at 4.75 per cent. Then it stood pat for next 11 months. After making a double bottom in March 2009, $SENSEX started to rise. It briefly traded in a range in early 2010 before testing the all time high in the later half of 2010.
Beginning March 2010, RBI started to raise rates to slow down the supper hot Indian economy. For next 19 months it implemented 25 bps increment – reaching a high of 8.50 per cent by October 2011. During this time $SENSEX tested the all time high and made a double top and them fell for most of 2011. From the high made in November 2010, $SENSEX fell by more that 21.9%.
During this time inflation was rising and economy was gradually slowing down. By late 2011, $SENSEX was in bear market territory, inflation was plateaued stubbornly at a high level and economy was stalled. So it was natural that the industry was looking for a respite. Experts floated various scenarios in which the RBI could lower rates. $SENSEX turned around and became one of the best equity market index of 2012. So fare it is up by over 24% year-to-date.
After making a low of 15135 in late 2011, $SENSEX rose to a high of 18523 by February 2012. It then declined to 15748 by June 2012. Since then the index is steadily rising. In the process it has formed an un-even head-&-shoulders pattern. The pattern has come after a short decline. $SENSEX declined from a high of 21080 made in early November 2010 to the low made in December 2011. Nevertheless, the pattern is visible and valid. $SENSEX broke above the February 2012 neckline high of 18523 in September and has stayed above the broke-out level.
Presently it is testing the breakout level but if the pattern holds then the potential target is near 21000, which is near the all time high.
NIFTY-fifty, the index of major Indian companies (DJIA of India), is also showing a similar H-&-S pattern.
EPI – Wisdomtree India Earnings Fund – could be used as a proxy for $SENSEX. EPI followed the index well during 2009 to 2010 rise but since 2011, it has been lagging. EPI made a double bottom in May 2012 – making a low earlier than $SENSEX but falling lower. Since this it has not gone above 2012 high whereas $SENSEX made new 2012 high. IF EPI reasserts its linkage with the country’s main index then it has much more room to go up. On the other hand, the bigger companies in the ETF markedly underperform then national index then the breakout in $SENSEX may not last.
That would be, drumroll please, Chicago Fed President Charles Evans, again. This is via MarketWatch:
In a speech to the C.D. Howe Institute, an independent not-for-profit economic research firm based in Toronto, Evans said policy makers should vow low rates until unemployment falls below 6.5%, as long as inflation is not forecast to rise above 2.5%.
He says that 7% threshold now seems “too conservative.”, and, we concur. The US economy may be recovering gradually, the persistent high unemployment remains a big cause for concern. And, although, global economy is a-okay at the moment, it is placed very precariously. Also, the global-growth-engines status of major emerging economies is still kind of justified, they cannot continue to pull the world ahead without significant help from the ‘old growth-engine’, the USA, now that her usual sidekick, Europe, is going to be AWOL for considerable future.
Evans also notes that even with a policy stance like the one he suggested, Fed will have many course correction opportunities that it could avail.
“If we continue to have few concerns about inflation along the path to a stronger recovery, there would be no reason to undo the positive effects of these policy actions prematurely just because the unemployment rate hits 6.9%,” he said.
Not that he is concerned that inflation will trump unemployment concern soon. Adding:
“We’re much more likely to reach the 6.5% unemployment threshold before inflation begins to approach even a modest number like 2.5%,” he said.
The market is also agreeing as it does not seem to be fearing any rise in inflation in the near future. Here is the weekly chart of 30-year treasury yields, which is trading at the near all-time low and is showing no sign of getting off that level. From 2002 to 2008, when the unemployment was sub-5%, the yields fluctuated between 5.4%-to-4.14%. Today it is it is around 2.79%.
The annual inflation – annual change in CPI – during this period was, also, not very high. For most part it fluctuated between 1% and 3%. Presently it is around 2%.
The Goldman Sachs Commodity Index (GSCI) is also not showing runaway prices for commodities. It fact it is stuck in a descending triangle, which is a bearish chart pattern. If the pattern holds true to its usual intent then a breakdown in commodities prices will indicate deflation and not inflation.
Carney cuts a statesman-like figure, rising above partisan affiliation, respected even by his detractors, and consistently open to dialogue, say bankers, all of whom are critical of the intellectual and operational thrust of Basel III.
But, Carney seems to be having a running feud with JP Morgan’s Jamie Dimon or, perhaps more accurately, Dimon is waging it and Carney is merely responding.
Carney seems comfortable with the universal banking model – if buttressed by low leverage, prudent lending practices and strong supervision, as Canada’s success lays bare – but his ideological antipathy to Dimon’s views runs deep. Dimon’s attack on Basel III – reflecting the views of many of his global banking peers, who rarely speak on the record with such candour on regulatory affairs – is rooted in a laissez-faire view of the world. In an illuminating testimony to US policymakers in January 2010, Dimon incurred the wrath of reformers with the following statement: “My daughter asked me when she came home from school, ‘What’s the financial crisis?’ and I said, ‘It’s something that happens every five to seven years.’”
He is pro-reform.
For Carney reform is do or die. He says: “The major emerging market economies, having been side-swiped by the last crisis, have a concern about the health at the core of the global financial system, so the idea that we can somehow slow down the reform process and release capital rather than build it, and somehow that will help reinforce an open global economy, is fanciful.”
He is aggressive in battling off one of the central, and most emotive, arguments advanced by banks: that higher capital requirements and restrictive capital formation frameworks threaten to torpedo an already weak global economy while exacerbating pro-cyclical debt deflation. “The argument that financial reform is causing a shortfall of capital fails to take into account the fact that there are jurisdictions where there appears to be a fundamental shortfall of capital in a material number of institutions that is preventing the functioning of that financial system,” he says. “The shortfall is down to the fact that these banks are a long way from a reasonable level of capitalization in any way that’s transparent.”
He is a shrewd observer and a prescient analyst.
While the European Central Bank delivered a rate increase in July of that year, Carney’s market instincts rightly judged that the leveraged-loan crisis would trigger global contagion. And when policy rates in Canada hit the effective lower-bound, the central bank combated the crisis with the nonstandard monetary tool: the “conditional commitment’” in April 2009 to hold the policy rate for at least one year, in a boost to domestic credit conditions and market confidence more generally. Output and employment began to recover from mid-2009, in part thanks to monetary stimulus.
And, a pragmatic regulator.
The zeal with which Carney introduced this financial stability objective into the central bank’s mandate reflects the same philosophy that underpins his approach to regulation: the financial bubbles in the pre-Lehman Greenspan world order highlight the foolhardy contention that market forces can regulate finance. By contrast, ex-ante regulation, fleshed out in a necessarily imperfect framework, can and should mitigate excesses, he reckons. It’s a belief that also reflects Canada’s intellectual heritage, in the vein of William White, former chief economist at the Bank for International Settlements, and Malcolm Knight, the BIS’s former chief executive, two Canadians who have occupied senior posts in international finance. Both White and Knight sounded early alarms over weak regulation and excess risk-taking that fed the US sub-prime mortgage bubble, with White currently an influential proponent of the view that the loose G7 monetary policy cycle is fuelling asset bubbles.
Overall, he may be the doctor that UK needs.
It’s clear Carney is no career-serving technocrat or a soldier simply executing the regulatory battle for his G20 generals. Although David Dodge, Carney’s predecessor as governor, occasionally commented on public policy challenges, Carney “has played a more active role in economic affairs than any other central banker in recent Canadian history,” says Nixon. “He has rightly broadened, informally, the central bank’s mandate and has done so because he has the platform, the economic skills and practical working knowledge of capital markets.”
And why not? It’s paying 0.38 to 0.93 percentage points more than comparable Treasury rates in interest for the bonds, which mature in 3, 5, or 10 years.
As of the last quarter, Amazon had $5.25 billion in cash and short-term securities, and no long-term debt. But it has plenty of uses for that cash: First, its headquarters, which it just agreed to buy for $1.16 billion. Second, its gigantic fulfillment centers, which it is planting across the United States as the old sales-tax regime (where online retailers where exempt from collecting tax) falls apart.
Chart pattern for Amazon is also indicating that something is in the stores for AMZN. It is in the process of making a cup-&-handle pattern on the weekly chart. The cup started its formation in October 2011 and completed the shape in September 2012, with right rim slightly higher than the left rim. The subsequent retracement reached to about 38.2% Fibonacci ratio of the rise from the bottom of the cup to the right rim.
Currently, the handle is not complete though it has taken about 11 weeks to form. The cup took 48 weeks to form. If the C-&-H breakout completes in another 3-5 weeks than the pattern will have significance.
In the absence of clearly-defined goals, we become strangely loyal to performing daily trivia until ultimately we become enslaved by it.
- Robert Heinlein
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