In Search of a Higher High
The definition of a bull market is a market that is trending up. In technical analysis terms, an uptrend consists of a series of higher lows and higher highs. The current rally has run for 8 (practically) consecutive trading days so far. Is it a bear market rally? Well, its a bear market, and its a rally. So far it can only be called a bear market rally. This is not to say that we haven't seen The Bottom, because in technical terms there is no way of knowing for sure now whether we have seen it. However, one important piece of supporting evidence to suggest that the market has gone from bear to bull is the definition itself. In this article, the sector charts that are close to making higher highs are featured. If these higher highs are achieved, then it is very likely that a new bull market is here and the leadership of the new Bull Market will come from these leading sectors.
A scan of the 3-year weekly charts within most lagging sectors shows pretty much the same chart throughout. That is, of severely down trending price action followed by a massive 8 day rally. Typical of such action is the chart of the financial services ETF, shown below. Here you see a deep and decisive downtrend followed by a sharp rally that does not (yet) refute the overall trend, which is still down. The most profitable way to play this rally would have been to hop aboard the most troubled sector and ride it for at least 8 days. In the case of the financial services sector, a gain of over 30% in less than 8 days was achieved.
The more diversified Dow ETF also produced a more modest gain; but the chart pattern, consisting of lower lows and lower highs, is the same. There are not yet the elements - higher lows and higher highs - of a bull market.
In the leading sectors, there are many charts that are at or approaching a key element of a bull market - that is, of a higher high. The leader within the leaders is the gold stock sector. The long term pattern is not a technical picture of long term health because of this fall's crash. Yet, a move above the early 2009 highs would solidify the gold stocks as a leading sector.
The semi-conductor sector is now a leader. Here a "neckline" has formed in the $18.75/share area. In addition, the lows from 9 days ago were higher than those of November 2008. A break onto higher ground than the neckline, near the mid-19's would complete the definition of an uptrend as described.
The internet holders ETF is in the same technical predicament. A higher low has been made, and a higher high is anticipated, but not yet achieved.
The Oil Service Holders ETF shows similar, but slightly weaker action so far in the short term.
Finally, technical strength is shown in the emerging markets, including China, Taiwan and Brazil. Here are the 3 year weekly charts of these ETFs. In the case of the FTSE/Xinhua China 25 I-shares there is a bursting bubble in late 2007. Yet in the shorter term, the action is looking technically strong although a lot of distance to the upside must be covered before making a higher high near $32/share.
In the case of the Taiwan ETF, it is no coincidence that the chart is shaped pretty much like the semi-conductor ETF because of the dependence of that industry in Taiwan. The area of $8/share will be important to hold for this potential leader of the next bull market.
Similarly the resource-rich Brazilian stock market is showing relative strength and $40/share is an important neckline level.
Today the Dow and S&P finished down 85, and 10 respectively. The Nasdaq was down only a couple of points. Of the stocks approaching higher highs, the gold mining ETF (GDX) finished up 6.5% to the highs from a few weeks ago. The semi-conductor ETF was down about 1.25%, the Oil Services ETF was up 5% moving closer to its neckline, the Taiwan ETF down 1.0%, the China ETF down 1.5%, and the Brazil ETF up 1%.
Of immediate technical interest is the action in the long bond. Below is a daily chart of the long bond ETF (TLT) from late 2008 to the present. Since making what appears to be a bubble top (a gapped parabolic move in the direction of the 27 year old trend, not shown), the overall trend for the bond market was down until early February. In early February, bonds remained in a fairly tight range between $101 and $106/share. Yesterday's announcement that the Fed would buy lots and lots of long term treasuries sparked a knee-jerk rally; but after a few moments, bonds went back into their 1-1/2 month old range. There was no rally follow through today either. While the bonds can rally from here, it is difficult for me to conjure up any news that would be more bullish to the bond market than what we have already heard yesterday. For now though, the lack of trend probably needs to be given the benefit of the doubt.
A lot of traders bought protective puts today as the volatility index ($VIX) spiked off of support at 40.
About Martin Goldberg CMT
martin.f.goldberg @ gmail.com
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