Archive for October, 2011

by David G. Hawkins

Intermediate Term – The Weekly Bars Chart

The first chart here is the update of the chart in my last post, expanded.  In that last post two weeks ago, it was quite unclear to me what was happening.  But now we can see that price broke out from its consolidation very strongly to the upside, blasting right through three significant resistance levels.  Now it’s clear that a very strong uptrend started in early October with the bounce up from the old S1 level.  We can get a more detailed look at this uptrend on the next chart.

Short Term – Daily Bars Chart

Here we see clearly the robust uptrend we’re in on this timeframe, which started on Oct. 4th with the bounce off of Weekly S1.  There was a minor pullback on Oct. 20th, and I have fit a TopFinder to that pullback which is now 3/4 done, projected to end at the horizontal location of the dashed vertical purple line.

Long Term – Monthly Bars Chart

The last chart here is the monthly bars chart.  The size of October’s candle shows that volatility has really increased.  However, even though this is a tall white candle, it doesn’t change the observation that, on this timeframe, the market is still in a downtrend that started at the end of May.  Price is still holding below resistance while starting to break supports, and that’s the Midas definition of a downtrend.

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by David G. Hawkins

The Weekly Bars Chart – Stair-stepping Down With Increased Volatility

The chart here is the updated weekly bars chart from late 2008.  In mid August of this year, the market started a wide sideways consolidation, bounded on the bottom by Old R4 and on the top by the light gray horizontal line that is defined by the high of November 2010.  Two weeks ago, price broke sharply below Old R4, but then bounced strongly at Old S1, the primary support curve launched from the major market bottom in March of 2009.  And last week, price roared right up to the top of this consolidation range.

It’s very difficult to categorize what’s going on now.  If the break below Old R4 signaled the start of a new downtrend out of the consolidation, then I would not have expected price last week to come all the way up to the top of the consolidation.

There are two probable interpretations of what’s happening.  The first is that two weeks ago’s bounce off Old S1 is the start of a new uptrend.  If so, then expect to see price break up out of this consolidation top.

The second interpretation is that price is indeed starting a new downtrend but with greatly increased volatility.  And if this second one is true, then we’d expect to see price turn down either from where it is right now or from the next resistance level above this, and then go on to break below Old S1.

I’m leaning towards the second interpretation because both the monthly and the quarterly bars charts are suggesting that we’re already in a new downtrend.  That’s why I’ve set up those six levels below the consolidation range, which come from support curves on the monthly and quarterly bars charts, along with a significant horizontal level (gray line), and the blue dotted line which is the 23.6% Fibonacci level from the monthly bars charts.  These levels are the ladder of supports, and one should look for price to go on stair-stepping down through this ladder, forming minor pullbacks at some of them as it goes down.

Of course, I could be wrong.  The first interpretation may be correct; we may be at the beginning of a new uptrend.  If so, we’d expect price to stair-step up through the resistance levels above the consolidation range.

I wish I could be more definitive, but the current state of the market simply isn’t clear.  Furthermore, as I’ve said so many times before, I don’t predict what will happen, only describe what is happening right now.  And right now, it’s just not clear what’s happening.

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by David G. Hawkins

Since this is both the end of the month and the quarter, I’ll concentrate on the monthly and quarterly bars charts, especially the quarterly one.  In the two weeks since my last update here, the weekly bars and daily bars charts have changed very little, still in basically sideways consolidations.

Long Term – Monthly Bars Chart

The first chart here is the updated monthly bars chart, and there isn’t much more to say about it than I said a month ago.  The latest candle is still just sitting above the Old R4 curve.  So, let’s move on.

Very Long Term – The Quarterly Bars Chart From 1980

The second chart here is the quarterly bars chart from 1980 through yesterday.  Unlike all of my other charts in this blog, which are equivolume, this one is time-based, and the Midas curves on it, including the TopFinders, are all calculated with every volume datum set to 1 instead of using the real volume data.  In chapter 6 of our book, I go into a lengthy exposition of why it is necessary to make these changes when analyzing the very long term timeframe, and am not going to repeat that here.

Early 1982 was the beginning of the monstrous Baby Boomer Bull Market that ran until 2000.  Notice that TopFinder TF1 tracked it beautifully, ending within the the bar after the top.  After the Internet bubble burst in 2000 and the market crashed down to its low at the end of 2002, a powerful new uptrend brought it right up to the 2000 top again.  See how TopFinder TF2 tracked that perfectly.

Next the Great Recession started in 2007, taking the market even lower than it was in 2002.  Now notice the most remarkable thing:  That green curve is the Midas support curve launched at the beginning of 1982 bull market.  As the market came crashing down in 2009, it stopped exactly at the support curve and bounced up!  If you’ve been reading our book and following this blog, this sort of behavior should no longer be a surprise to you.  I’ve been at this for over 16 years, yet every time I see this happen, it still raises the hairs on the back of my neck.  The Midas method works so well it’s almost spooky!  When the market started to move up in the second quarter of 2009, absent the Midas method you would’ve had no reason to trust that a real bottom was in.  But, seeing the bounce off such a major Midas support curve would’ve told you.

In April of 2009, the market started another powerful uptrend, looking very similar to the one that started in 2003.  TopFinder TF3 is tracking it, and it is only a bit more than half done, projected to end at the dashed vertical purple line, which could easily take it up above the 2000 high.  At the end of last year, the market broke strongly above those two major red resistance curves, attesting to the strength of this uptrend.

But in the second quarter of this year, the market stalled, and this third quarter saw a dramatic pullback, which closed below both the S2 tracking this trend and TF3.  Closing below the latest S curve is the Midas definition of the end of a trend.  Therefore, I must conclude that the uptrend that started in April of 2009 is over.

Why did this latest uptrend end so prematurely?  I think it is certainly no coincidence that the top in June happend exactly at the end of the Fed’s QE2 program.  The money from QE2 didn’t go into helping the economy, it went straight to the stock market.

Very Long Term – The Quarterly Bars Chart From 1950

Now let’s look even longer term.  The third chart here is the quarterly bars chart from June of 1950, which is the earliest date for which we have daily data on the S&P 500.  This is just a few months after the 1949 beginning of the huge Eisenhower Era Bull Market that ran up to 1972.  The lowest green Midas S curve on this chart runs essentially from the beginning of that bull market, and is analogous to the curve started in 1982.  When the market swooned over 40% in the recession of the 1970s, it came down and supported right on that lowest curve, another hair raising performance of the Midas method.

It’s simplistically tempting to continue the analogy, and say that, after we work through some short term difficulties, we’ll be off to another major very long term bull market.  But, there are darker, more ominous clouds on the horizon.  This chart from 1950 is part of a much longer term pattern going back many decades further.  We have monthly price data on the S&P 500 going back to 1871, and in our book I have done a thorough analysis of it.  What it shows is that there are very long term, very deep cycles, and at the present, the market has not yet gotten to the bottom of the current cycle.  This analysis is too much to put in a blog post, so I encourage you to read our book.

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