Whenever in doubt, zoom out. Monthly charts are a great way to do that. On November 30th we got new daily, weekly and monthly candles. This is a lot of new data that we have to work with.
Here is what I’m seeing out there:
Let’s just start with the granddaddy of them all, Dow Jones Industrial Average. Here are the futures running into the 261.8% extension of the 2007-2009 decline. This is a level we’ll likely be pointing to for decades to come. It’s been resistance all year and ultimately, when we do break out that will be our new floor. Who knows how long that will take, though. It’s up to us to take the data we have and weigh the evidence so we can make a judgement responsibly:
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The question in the Dow is whether this is a “double top” at a logical level? Or is this just part of a longer-term range below a logical level of resistance and then ultimately we break out in the first or second quarter of 2019? We’ll go through other charts to get clues so we can answer this question as best we can.
The Nasdaq Composite is one of the many examples in this market of failed breakouts at important levels. In this case, we’re talking about the 161.8% extension of the entire 2000 decline. That 7620 level has been and still is our key level. We don’t want to be long these stocks if we’re below that:
You can see a similar picture in the Nasdaq100. We had an attempt to get through this level and it failed. It’s just what it is. So like the Dow, is this just a bunch of churning at a point of reference? We’re still trying to figure that out:
Here is the Dow Jones Transportation Index, stuck below 11,100. That has been our level and we don’t want to be long these stocks unless we’re above that:
Moving to small-caps, look at the Russell2000 failing at the 261.8% extension of the 2007-2009 decline. Again, this is happening at a very logical area, similar to the Dow and Nasdaq Indexes:
It was always the Mid-caps that have given us the best clues to the overall market. The ability for the Mid-cap400 to hold 325 helped us buy stocks more confidently in the first quarter declines. We’re looking to this index to help us in a similar way today. Why wouldn’t we? If we’re above 325, this points to a more range bound market for equities and ultimately breakouts in Q1 or Q2. A break down below that would argue for much lower prices for US stocks:
With Mid-caps, I think we can include the London FTSE100. This is one of the most important indexes in the world and it’s been breaking out of an 18 year base. It’s hard to be bearish equities in that environment. However, what if we lose those former highs? What then? That bullish thesis is invalid. And right now, that’s exactly the level we’re flirting with. It’s hard to be bullish if we’re back below the 1999-2000 highs in FTSE:
Sticking with that theme, look at Europe. We’re breaking down from consolidations, not breaking out:
It doesn’t get much more important than German DAX. Does this look like a top or a bottom? I see a perfectly normal topping pattern completing near the 2015 highs. We see this behavior all the time at tops. So should we bet that it’s not? If we’re below 11,900 in Germany, we want to be short. It’s that simple.
The way we’re been doing that is by shorting Deutsche Bank. This trade has been working and a 5-handle is not out of the question:
Here is the long-term chart of Financials. We’re below the 2007 highs. There is no evidence that this is a major top in U.S. Financials. If we start breaking below 24.50 then that could lead to much further damage. The longer that holds, the higher the likelihood that we ultimately break out above those 2007 highs and move on to start a new leg higher:
The tell, in my opinion, will be Broker Dealers & Exchanges. If we’re above those 2007 highs, the benefit of the doubt has to go to the bulls right? But how long before they’re proven wrong? This consolidation broke down, not up. But we’re still above the former highs. That puts us in no-man’s land.
Goldman Sachs on the other hand, has failed at those former highs and completing what looks like another traditional topping pattern:
Berkshire Hathaway, the largest component of the Financials Sector, went out at new all-time monthly closing highs. This is not a characteristic downtrends. We’re definitely getting mixed signals from GS and BRKB, which I find fascinating. To me it points to the fact that some stocks are going up and some are going down. What’s wrong with that?
Technology is the other big one, I think. We’re at the 2000 highs. Not above it, not below it. We’re right there. Which is it? The beginning of a new secular breakout in Tech? Or is this a massive failed breakout and we come tumbling down?
For help with Tech, I always turn to the Semiconductors. We’re flirting with important levels here too. We’re right near the closing highs from 2000 in Semi’s.
That consolidation this year, resolved lower. We’ve seen a lot of that, which is not something we’ve had the past couple of years. Remember consolidations used to resolve higher?
The relative strength has absolutely been in Healthcare and Consumer Staples. Healthcare just went out at a new all-time high. I can’t short that with a straight face. We’re buying them actually. If we’re above 90 in Healthcare, it’s hard to be bearish. We gotta be in.
Staples are another one. Go through all of them and I think you’ll find stocks with recent strength. This isn’t a downtrend, I’ll tell you that. It’s sideways at worst:
Utilities are another one that continue to do well. You’ll notice a lot of higher yielding stocks outperforming their counterparts.
Is that more of a defensive trade? Or is that influenced by fixed income investors not getting their yield in bonds so they’re coming to stocks? Is the stock market pointing to lower rates?
This month’s candle engulfed last month’s in the U.S. 10-year yield. The last one of these was in 2017, but to the upside that time. I still think if we lose 3%, you could see a face ripper in bonds:
Here’s that chart of the Bond ETF $TLT. If this gets back above 116.50-117, then 127 could come quick.
My big question is that if bonds are ripping like that and interest rates are collapsing, how are stocks behaving in that environment? I find it hard to bet that they will do well. It seems like it would be more of a flight to safety sort of scenario if anything. Sure, could stocks and bonds go up together? Absolutely. It will be interesting how that will play out.
Here is the chart of Stocks vs Bonds. Where is this current dilemma happening? At a perfectly logical level:
In the U.S. Dollar, we’re just back into this range from the past few years. We’re just churning back and forth, not going anywhere. I think that probably points to further upside. This is not a downtrend:
Euro is not in an uptrend. We’re sideways at best with clearly a bunch of selling pressure. It’s hard to have too much conviction in EUR and USD right now. They’re a mess.
You can see the British Pound failed at all of that former support from the past 25 years. There’s no reason to think Sterling will do well if we’re below that:
Gold is another mess. This thing can’t get out of its own way. Stocks go up, gold goes down. Stocks go down, gold goes down. These are not positive characteristics. We’re right smack dab in middle of a 4-year range. I see little advantage to messing around in this market, long or short, from any sort of intermediate-term perspective:
Look at Gold Miners. This is not an uptrend. Again, sideways at best:
So is Silver going to be the tell? This would be a logical level for it to bottom and start to rally back up towards the low 20s. And if Silver does that, Gold won’t be too far behind. We’ll be watching the 2015 lows as key support. The inability for Silver to hold those levels could take it down to the single digits. That would put gold in a precarious situation. I’m open to all outcomes but I believe Silver is going to be our best tell moving forward:
Crude Oil, the only commodity (other than Palladium) doing anything relevant has lost its step. Losing the former highs of 62 was the back breaker. There is no reason to think crude oil is going up if we’re below that. This is now a ton of overhead supply. Crude Oil is in a sideways trend, at best. But more likely it will see lower prices:
Finally, here is Bitcoin. We had a serious candle this month. Prices had been consolidating near that 6000 level for a while. I felt confident that an inability to hold that level could be catastrophic for the new internet that’s going to revolutionize the world with it’s blockchain technology and all that…..
There’s no reason to touch this thing if we’re below 6000. We could see 1000 and down there we’ll start to pay attention again.
Monthly charts are a great tool. It’s so easy to get caught up in the day to day noise. It’s hard to look at the big picture under those conditions. Monthly charts force us to take a step back and identify the direction of the underlying trend. Then we can work our way down to the weekly and daily timeframes, but being fully aware of the direction of the tide. This is how we keep the probability of success on our side.
Ping me if you have any questions.