Today's Market WrapUp 11.20.2008 Mon Tue Wed Thu Fri Goldberg Archive
Any Heroes Out There?
BY MARTIN
GOLDBERG, CMT
Point-and-Figure (PAF) charts probably produce the most boring commentary for non-familiar readers to digest. Even though they are not as exciting as momentum charts which can tell you almost anything you want to hear, the advantage of point-and-figure analyses is that it is the most objective type of technical analysis. One would be well served to consider that more often than not, intermediate term investments that go against the PAF analysis lose money. These charts send out “buy” or “sell” signals and there is no room for subjectivity. Although they are objective, as with any other technical analysis method, they can be late or produce whipsaws. It is at times such as this when PAF charts are the most useful because they are clear, objective, and unemotional. (While today’s markets are totally emotional.) The PAF charts of the markets are stating clearly that now is not a good time to be a hero trying to pick a market bottom. They are telling us that it is too early to buy the major indices.
The intent of this article is not to present a treatise on PAF charting. Still some basic principles are worth a brief overview. PAF charts do not have a proportioned time scale. This can be seen in the PAF of the S&P 500 below which shows the entire 2006 year’s market action within two columns. As the market or stock heads higher, the columns are filled with X’s. The uptrend (or downtrend shown with O’s) is given the benefit of the doubt in that a trend is not considered to be reversed until the action heads at least 3 boxes below the most extreme X (or O) in a column. When a new column is formed by this three box reversal, the immediate trend is reversed and the new direction is given the benefit of the doubt. A new column is thus started to the right in the opposite direction as the last column. Buy and sell signals are generated when the existing trend moves below (or above) the column of the same direction that is already protruding in its trend’s direction. For example in today’s action in the S&P 500, a new sell signal was generated today when the S&P 500 moved below the 820 level.
Also apparent from the PAF chart of the S&P 500 is the pattern of especially lower highs and lower lows which is particularly bearish. Note that 4 columns from the right edge of the chart; a “buy” signal was generated when the S&P 500 moved above 1,000 (in the last week in October - the date is not noted in the PAF chart). But this proved to be a whip saw/bull trap. As of today, the S&P 500 index sits right below the lows made in 2002 and 2003. While a rally off of its current oversold condition may occur, the preponderance of evidence shown in the PAF chart thus far, suggests that the rally will not likely be one of much long term technical significance.
In spite of the short term “sell” signal that was generated today, the S&P sits at what could be construed to be support at near 820. This may be considered by some to be support, but in my opinion, it would be folly to try to be a long term bottom picker at these levels.
The Wilshire 5000 is in a similar technical position as the S&P although the ‘02 and ’03 lows have not yet been tested.
Today’s action in the S&P Mid Cap index completed a particularly bearish descending triple bottom breakdown pattern today. This is a strong sell signal which suggests that the S&P mid cap index is probably not finished going down.
Today’s Market
Golly, what I wrote at 1 O’clock came to pass by the close as the markets tumbled in late session action. The S&P 500 hit an 11 year low at the close today. Of most import in today’s action is the bullish breakout in the bond market. It is shown in the chart below in terms of the long bond ETF (symbol TLT). A clear break of the ETF into new highs (long rates at new lows).
Here’s the same action in terms of the PAF – a triple top breakout. And the big picture in bonds shows a clearly bullish trend.
Finally, the relatively strong action in gold compared to the industrial commodities suggests that the market is starting to sniff out the inflation that is standing behind the deflation which is currently being caused by deleveraging everywhere else in the financial markets. Why all this deleveraging? It’s the speculators!!
Have a great thanksgiving.
Martin Goldberg
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