Friday, December 11, 2015

Technical Overview of the Market

Market is in sideways range and in doing so it has traced out a triangle pattern. Pure technical analysis says that longer term triangle patterns suggest that a trend reversal is approaching. Triangle pattern in DJIA is shown below:

While triangle pattern is almost complete, one could also construe market's current pattern as a head and shoulders pattern. However, the problem with this assumption is that the current pattern can be regarded as a either a upright Head and Shoulders or inverted Head and Shoulders.

Upright head and shoulders pattern suggest a market topping pattern. If market is playing out this pattern, we are in the right shoulder. In order to complete the right shoulder, market should decline from current level to the neck line. This potential pattern is shown below:

On the other hand, if we consider that currently market is undergoing consolidation and will soon breakout, an inverted head and shoulders pattern will support that call. In fact, current market structure also supports a potential inverted head and shoulders pattern, as shown below:

However, the fundamental flaw with this pattern is that its target, if pattern is completed, would mean that SP500 would rally to 2350. This means that economy has to do very well and easy monetary policy should continue. However, both of these are unlikely scenarios because after ~6 years of economic expansion, we are due for a recession.

Furthermore, proprietary indicators suggest that the stocks have entered a bear market in August and internals have continued to deteriorate since then, even with the sharp rally that we have seen over the past month or so. Therefore, one should be weary of the market and its prospects. Market should now prove itself before one can fully commit to the long side.

On the other hand, there are other investment vehicles like BitCoin, which has just entered a new bull market according to proprietary Bull/Bear model and could yield substantial gains for investors. But please keep in mind that BitCoins are very volatile and portfolio size should be adjusted accordingly.

In the upcoming blogs we will talk about:

  • Importance of objectivity and trend following
  • Elliott Wave analysis of current market
  • Alternative investments
  • Asset allocation
  • Tax implications

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