Yesterday we noted some short-term indicators that appear to be pointing to a correction. We didn’t go down to day-trader charts, but short-term swing trades would use the daily and weekly, or even hourly, to help them make trading decisions.
Our goal is to see how QE∞ will affect the markets. We all know we got a serious pop on Thursday with the announcement. But does that indicate or will that cause the markets to move any differently over the long haul. We don’t think so. And today’s charts are going to help us consider this more carefully.
The monthly chart below helps us to look at the bigger picture. Rather than looking at shorter term, it gives us the price at the close of each month spread over the course of ten years. We could have done longer, but this is long enough to make our point. And we could have gone shorter, but shorter simply doesn’t provide as clear of a picture.
Again the green bands point to drops and the blue to rallies. And, again, note the RSI and how it moves with price movement. We see danger overbuying danger signs in 2004, but each rally is kept alive with only minor consolidation until the economy is pushed into the bubble that eventually became the real estate crash of 2008.
The correction was strong and swift when it finally gave way. While the RSI was at its peak before the market peak, it did warn of the bubble conditions. Furthermore, the MACD had become incredibly embedded in the upper channels of the chart, signaling that relief had to come eventually.
The correction also over-corrected a bit, driving both the MACD and RSI into oversold conditions. And, of course, we saw a reversal of this that we are still, to some degree, enjoying today.
Last year we saw some topping that resulted in a strong consolidating move, but note that the MACD wasn’t satisfied. In fact, it’s remained largely embedded ever since as RSI has returned to overbought territory.
Expectations here should be at least a medium term correction, perhaps similar to what we saw mid-2007. A 10% consolidation could possibly be enough for the market to regather its feet and surge even higher. But, whether we get that this week, this month, this year or next year, we can count on it happening. Right now it’s looking sooner rather than later, but some sideways consolidation could possibly help it regather as well.
On the other hand, this cannot keep up and is showing that we’re bound for another hard correction in the future, not unlike what we saw in 2008. Again, timing is difficult. We could have a minor correction now, with a more severe one in a year or two, much as what we saw leading into 2008.
In order to understand this better, we’ll now turn to a quarterly chart. Like the others, this simply uses the prices at the close of each quarter. And, of course, we need a longer time frame to get our reference point here as well. In this case I chose a 40 year chart, as it offers some incredible insight. There are aspects that are hard to read though, so please bear with me as we consider this more closely tomorrow.
For now, please consider the shaded areas and their implications. Also, don’t be fooled by the shallowness of the early consolidations. Note that a drop from 200 to 100 looks small on this chart, but is a very powerful 50% drop. I’ll put together a chart for tomorrow that’ll illustrate this more clearly. Also, note where the RSI and MACD are right now. Actually, while a little overbought, it’s not that bad – not nearly as bad as coming into 2000s dot-com bubble crash.
For your prosperity,
J. Keith Johnson
The Gold Informant