Like fundamental analysts, us technical analysts don’t usually make decisions based on one data point only. Rather, we use a series of indicators, patterns and oscillators to decide whether to buy, sell or stand aside; then we look at similar and related markets to see whether the ideas back each other up. Every now and again such a powerful signal appears that it overrides the rest. This is at its clearest in candlesticks when markets are gyrating wildly.
We’ve seen it in stock markets this week, giving the lie to the idea that instruments are not correlated. It also underlines the fact that market sentiment is fragile yet is as important as the fundamentals underpinning economic forecasts. The current mantra goes as follows: the world’s economies are all doing well and should improve this year; inflation (which is a ‘good thing’) is coming back because unemployment is very low; that politics and elections are unlikely to overturn the apple cart.
We look at January’s monthly candles in four key areas to see if these assumptions might hold true. The FTSE 100 is not the clearest example of a shooting star candle (which is the Swiss Market Index’s crown). Candles have four data points: the opening price for the period (in this case monthly but it can be any time interval), the high, low and closing prices. If the close is lower than the open, then the body of the candle is shaded (grey when we drew these in pencil on paper).
In January the FTSE 100 settled close to that month’s low, having spiked to a new record high above the top of the broadening formation building since 2013. Failing further, for no apparent reason, taking us back down to January 2017’s low – rather a blow to one’s portfolio.
At 7100 we are poised on another smaller broadening top pattern, a monthly close below which would signal a bigger sell-off. Worth remembering that anything less than a 20 per cent loss is considered a correction rather than a bear market.
Palladium formed a bigger, better, shooting star candle in January. This followed a stellar rally to a new record high at the top of a very steep trend channel. This clearly marks an interim top, maybe the high for this year, as the ratio to other precious metals had become too stretched. If February’s price action reverses that of December, we’d end up with a three-candle pattern known as an evening star, reinforcing the bearish outlook.
The dollar index had a different but significant bearish candle this January, marking a clear break below an area of support that had held the three previous years. This continues the bearish trend channel that started last January and points to further significant losses, a minimum measured target at 86.00 equates to a 17 per cent loss from 2017’s peak.
As for US Treasury bond yields going higher, look at the chart of the 30-year. Despite this month’s squeeze, yields remain close to the record low, below the high of 2015, and under the 38 per cent retracement level from the post-financial crisis high in 2010. These still point to low or even lower yields. As for inflation, the price of inflation-linked TIPS paper has done nothing but sell off this year – so no one’s buying insurance against rising CPI.
