The Markets May Be Rolling Over

The last week has been very difficult. Hopefully we'll get back on track this week.

Before we continue the series on where we are in the grand cycle of things, a quick and important note on the short term direction of the markets.

The stock market, which we anticipate will, at some point, crash to either retest the March 6 lows or move to new lows, looks as if it's ready to roll over now.

The chart below shows the short term concern on the S&P 500.



A short lesson on technical charts...

Our approach to investing and financial survival is to look at the long term--what we believe must happen based on what's going on today and the general trends facing the world. That's fundamental analysis. Ultimately, the dollar has to crash, probably along with several other fiat currencies, inflation will take over, commodities and "real things" will rule the day, and Asia is likely to become the next financial powerhouse. But there's always the question of "when" that will occur.

Technical analysis is a tool used to help guide the issue of "when?" This chart of the S&P 500 taken this morning on July 6, 2009, shows an interesting chart pattern forming called a "head and shoulders" pattern. Here is a good explanation of that chart pattern from stockcharts.com.

In essence, this pattern shows a reversal of the current market condition where the stock market has generally been going up since March. We use the S&P because it's a broader measure of the economy than the Dow Jones Industrial Average. On the chart, you can see the up trend as the S&P from March 23 as it rose in a range between the two blue lines. In mid-May, it went into what is called a consolidation pattern as it started going "sideways" and left the blue uptrend channel. Now, you can see the formation of the head and shoulders pattern where there is a left shoulder, labeled by "LS," a head labeled by "Head," and the current formation of a matching right shoulder labeled by "RS." There is a red line and a green line drawn that show the possible "neckline" of the head and shoulders pattern. Essentially, when the market moves below the "neckline," then you can expect it will fall until it hits a target price equal to the distance between the top of the head and the neckline. Until the neckline is broken to the down side, the pattern is NOT active.

So here's the rub. Stay with me...

In this case, the left shoulder may be a simple left shoulder, with the top at about 925 on the spike, shown by the green vertical line. If this is the left shoulder, then the green upsloping line is the neckline. That means that if we close lower today, then the pattern is active.

However, a head and shoulders pattern needs to be "well formed." That is, this pattern needs to resemble looking at a person with two shoulders and a head. The head can't be too long and "pointy." The shoulders need to be approximately the same distance apart.

This may turn out to be a "complex head and shoulders," which we suspect will be the case. In this scenario, the left shoulder consists of both the peaks that contain the red vertical line and the green line. To be "well formed," we'd need to see the right should be similar in size and length. That neckline corresponds today to approximately the 200 day moving average on the S&P of 886. Since the 200 day moving average (200 dma) often serves as a point of support where the market will bounce, then we tend to believe that the market will close at or above 886 today and NOT activate the head and shoulders pattern--yet. Instead, we would expect a bounce of a couple more weeks, rising to probably around 920-930 and then coming back down to break the neckline after the right shoulder is more "well formed." The target price for the S&P in the shorter term--over the next few weeks--is likely going to be around 835 after the pattern goes active. This would correspond to the rally in the dollar, which we'll touch on next.

Either way, now is a very dicey time to be taking any positions in anything. If we break below the 200 dma today, it's a sell signal in the short term. If you're a trader, sell. If you're holding longer term, take some money off of the table but keep a small position and see what happens when we hit 835 or so. The dollar rules everything--if it breaks down, we go higher. If it strengthens, we go lower.