Transports confirm industrials
Fresh all-time highs are clearly a bullish development from a technical standpoint. Of particular note is that the Dow Jones Transportation Average has also gone to a new record level, joining the much better known Industrials Average. According to Jack and Bart Schannep (www.thedowtheory.com), this is called an "in the clear" signal. Hitherto, the bears have been highlighting the Transports having lagged behind back as a negative omen.
Bullish pundits
Aside from the negative seasonal tendency of this time of year, the sceptics are also pointing to the overly bullish mood among pundits right now. The Investors Intelligence Advisors Sentiment report shows 52.1 per cent of those surveyed are bullish and 19.8 per cent bearish. A gap of 32.2 points is indeed high by standards of the recent past and has often heralded a top in the near future.
I am not too worried by this, though. I don't believe that bullishness is yet excessive on Wall Street. The latest AAII survey of individual investors still showed slightly more bears than bulls. While I think both are valuable, I would heed the message of the AAII over that of the II when the two are in conflict. The former seems to be more sensitive to changes, whereas the latter can get stuck for extended periods.
Via Twitter, Olu Odeniyi congratulates me on my successful DAX call, but is curious to know what my next targets were based on. The DAX is, as we have seen, now in 'blue sky' territory. Having got above its all-time high, there are no past price levels left to act as objectives. This clearly presents a challenge to the technical analyst, as past levels are generally the most credible price targets.
DAX's future targets
The only way that I'm aware of deriving targets technically in such situations is to make projections based on past activity. There are various options here, including point-and-figure charts and drawing channels. My solution is to use Fibonacci projections. This involves measuring the distance between previous significant highs and lows and extrapolating them upwards.
I have to admit that I am not fully comfortable with this approach. In recent years, I have tried hard to shift my technical analysis towards evidence-based methods, which can be backtested to prove their worth. Fibonacci projections - and retracements - are faith-based methods, along with the Elliott Wave Principle, Gann Theory and so on. I do not mean to disparage these disciplines. I just never made them work for me.
Where next for FTSE
Applying this esoteric method gives me near-term targets for the S&P, Dow and DAX of 1670, 15296 and 8424. For the FTSE, it is an easier task because there are still past levels standing in its way. The 2007 highs at 6754 provide an especially obvious objective. I am continuing therefore to buy the indices on recoveries from any intraday weakness.
