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All eyes on the US

Created:
23 July 2007
Updated:
24 July 2007
Written by:
Marc Rivalland

Although the Dow Jones took a beating on Friday 20 July, it is so far away from its trend change point (13258) that the sell-off cannot be any cause for concern. In swing charting terms, this is a mini-correction which will probably produce a repeat buy signal. That will establish a fresh and higher trend change point. Only if the repeat buy signal fails is there likely to be a change in trend. The point and figure chart (50 point box) is similar. It has the kind of shape that leads to a bullish shakeout buy signal. Provided the Dow does not fall below 13700, and it then executes an upward 3 box reversal, a repeat buy signal would be given. The bullish shakeout buy signal was first identified by Earl Blumenthal in the 1960s. It is true that he applied it only to the first signal after a change in trend. In other words, it would occur soon after an uptrend began. That is hardly apt to describe the present position in the Dow.

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Still, the bullish shakeout shape remains one of my favourites, wherever it occurs in the trend. First, the chances of an explosive move upwards are always good with this formation. I confess I see little basis in the fundamentals for more violent upwards price action. It is true that the bond charts all gave buy signals on Friday 20 July, but it was not a happy event. It was caused by a flight to quality from collapsing credit spreads. It is scarcely a solace for equity markets. But who knows. Believe what you see in the charts.

Secondly, if the market does merely stagger up and then fails to make a new high, there is still money to be made because the subsequent retreat will usually generate a spread triple bottom sell signal. And that is what I like about this formation. It will usually lead to a decent move, up or down. The S&P 5 point chart also has a bullish shakeout shape, provided it does not trade down to 1520.

The Nasdaq 100 continues to outperform the Dow – a key bullish factor, but its weekly and monthly RSI levels are in danger zones. Elsewhere, small negative factors continue to accumulate. Unlike the US indices, the European indices are quite close to entering short-term downtrends. The trend change point of the FTSE 100 is 6495 and its on-balance volume chart is abysmal. And for the first time since March 2003 when this bull market began, the FTSE 100 50 point chart has a formation which is capable of generating an important sell signal. It would have to fall to 6450 for a triple bottom sell signal to be confirmed. The CAC 40 did execute the initial 3 box reversal which I discussed last week and which is consistent with a bull trap. But bull traps can easily turn into bullish catapults, so one can’t get bearish yet.

The sombre look of the European charts appears to be giving us a clue that any bullish shakeout buy signal in the US will ultimately fail. But it is too simplistic a conclusion. Do not underestimate the possibility of the Dow and Nasdaq storming up, and transforming the Eeyores in Europe.

The selling in Land Securities did stall at the 1,700p level, but I still haven’t sold the December put options yet. I will do so if the high of Thursday 19 July at 1,811p is breached.

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