Dow's spiky action
As a result of all these gyrations, the charts have a very uninspiring look to them right now. True, the US indices and the FTSE have all now made higher highs and lows for the move that began in early August. Overall, though, it looks like that move is correction against a larger downtrend. Specifically, it seems to form a bearish "rising wedge" formation.
FTSE's rising wedge
Rising wedges are tricky to trade. You have to buy on bounces off the bottom of the wedge and reverse into shorts at the top of the wedge. The pattern completes with the price plunging through the bottom of the wedge, resuming the larger downtrend that went before it. I have therefore bought the Dow on Wednesday, 7 August, targeting a move up to the top of the pattern, currently around 11758.
Aside from the fact that rallies like these usually come to sticky endings, I am perturbed by an ominous signal that has flashed up for the US stock market. The Coppock indicator has now given a further sell signal, which in turn has helped to complete a "killer wave" pattern. I discussed the potential for such a signal to occur , saying it was something that would turn me more bearish.
Killer-wave anatomy
A killer wave is formed as follows. The Coppock indicator gives an initial sell-signal, which it did last summer. However, the indicator subsequently turns up once more, without first having registered a reading of below zero. This happened in April 2011. The killer wave is then completed once a further sell-signal occurs, forming a sort of "double top" pattern in the Coppock indicator.
I have identified eight killer waves in the S&P 500 over the last eight-three years. All have been followed by substantial losses. The average fall following a killer wave has been 39.7 per cent over 20.1 months. So, a killer wave is something that occurs in the fairly stage not simply of a bear market, but a big bear market. Notable wave sightings occurred in 1929, 1974, and 1987. You can see this explained in my webcast at http://bcove.me/jkg2nley
Could this signal be false? All the previous signals have ultimately proved successful. However, it is not uncommon for the second sell-signal to be reversed a couple of times before the selling proper begins. This happened most recently in 2007, where there were 3 false second sell-signals, before the market started heading properly south. I don’t see this as especially likely this time round, but I guess it is possible, particularly if there is massive intervention in the markets by the authorities.
Gold's double-top
I recently made the case for a larger correction in gold in this video - http://bit.ly/q84Dgh Like stocks, gold has been gyrating wildly of late. Such volatility is a common feature of highs in a market. Not only is gold very overbought on its longer-term charts, but it has not formed a possible bearish double top pattern. This certainly isn’t the beginning of the end for gold. But a decent fall could well set up the longer-term buying opportunity I'm after.
