Wednesday, June 16, 2010

Where DOW, S&P500, Global Markets Heading?

“It is a good time to take profits in long positions in Western markets. It is also a good time to buy into the China market as the rebound signals are confirmed.”

Wow! Says Who? It's Daryl Guppy, who wrote a long article in the recent issue of The Edge Singapore! Below is a summary of key points to note:

  • CHINA leads again, the first major economy that attempted to unwind the stimulus packages implemented during the global financial crisis, in terms of the potential impact of this process.

  • The broad pattern of behaviour — rapid long rally recovery followed by consolidation — is initiated by the Shanghai market, which is followed by other markets with a lag of six to 18 weeks. This is simply an observation of a broad and correlated behavioural relationship, not implying Shanghai market behaviour influences the Dow Jones Industrial Average (DOW)’s behaviour.

  • Shanghai Index’s fall below the lower edge of the equilateral triangle was followed by a rapid decline of 17%. Hmm... a high probability that similar decline in DOW and other markets will also be followed by a rapid decline.

  • Shanghai market gives us an idea of the shape and behaviour of the much-anticipated double dip. If Shanghai market is successful in developing support near 2,481, then it suggests that the double dip in Western markets will also not probe the March 2009 lows. This advance behavioural warning gives traders and investors invaluable information when it comes to managing the current Western market’s weakness.

  • Shanghai Index continues to develop the classic breakout-consolidation pattern: a retest of the support area near 2,481, a double bottom, which is often a signal for a strong recovery.

  • However, this development comes with three warnings:
1. In 2008, the bottom was created near 1,670. The current double-bottom pattern is not a true bottom because it is higher than the 2008 low of 1,670. A development of strong, new trend breakouts is signalled by a sustained move above 2,680.

2. The 2,481 mark is not a historical support level, however index activity over the next several days may confirm this as a support level.

The nearest support level is at 2,300. There is a strong probability the market will temporarily dip towards the historical support at 2,300 and then rebound rapidly. This dip could develop as a one-day fall or rebound, or a three-day pattern. The key features confirming the temporary nature of this dip are the reduction in volume as the market falls and the increase in buying volume as the index rebounds. A rapid dip below 2,481 does not invalidate the development of the consolidation pattern between 2,481 and 2,680. A fall below 2,481, followed by a fast rebound above that level, is a buying signal: a sign of desperation sell-off.

3. With the long-term equilateral triangle chart pattern, the downside target is near 2,230. This level is located near the middle of a broad historical consolidation pattern. The market could fall rapidly towards this level and then quickly develop a rebound. This is another type of desperation sell-off. A low volume during the fall and an increasing volume during the rebound are a strong buy signal.

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