-------------------------------------o-------------------------------------
When briefly recounting the origins and historical background of TA in his book Trading For A Living, Alexander Elder commented on changes in overall market behavior that occurred on the generational time frame, one of which may be applicable again, but in reverse. The following paragraph from page 70:
“Markets have changed a great deal since the days of Edwards and Magee. In the 1940's, daily volume of an active stock on the New York Stock Exchange was only several hundred shares, while in the 1990's it often exceeds a million. The balance of power has shifted in favor of the bulls. Early chartist wrote that stock tops were sharp and fast, while bottoms took a long time to develop. That was true in their deflationary era, but the opposite has been true since the 1950's. Now bottoms tend to form quickly while tops tend to take longer.”
I suggest that we are once again living in a deflationary era, and I think we, bulls and bears, can all agree on that one shared piece of common ground – otherwise why the need for such urgent, massive, oversizing of the global money stock?
As I alluded to in my last weekend post, while we continue to see the vestiges of inflationary era mentality in the ever increasing willingness by market participants to immediately “buy the dips” even as those “dips” become shorter and shorter in terms of time and shallower and shallower in terms of relative price, I submit that this phenomenon is leading up into a longer term spike high in price that is much more indicative of a deflationary environment than its inflationary counterpart.
Using the S&P 500 as an example, I submit that in fact it's already happened twice in this still very young century with both double tops in 2000 and 2007 taking between 4 to 6 months to form (depending on how one defines them) and presaging steep, 40%+ declines. With it already having happened twice, I'm not sure that another, third “double” top argument on the part of the “topping is a process” crowd is all that likely this time around. After all, the “topping is a process” thesis would really be part of an inflationary backdrop, would it not? Furthermore, might we not be able to reasonably argue that the “process” is now over 13 years old already?
Based on this rationale, I can envision a very plausible spike high termination for this cyclical bull market in equities, and I'm quite confident that I am not the only person around who sees this. There are thousands of analysts who are much smarter than I am, who have much more experience and are much better informed with much better access to market data than I have, who most certainly have considered this possibility. I am but a fool in their shadow, the TA court jester as it were, and if the court jester can see this and expound upon it, they most certainly can as well.
The question is: when will the collective begin to act upon it?
-------------------------------------o-------------------------------------
In reviewing the situation using the DAX setup as our proxy, it looks like everything is pointing up, or is it? On the daily time frame we see previous bearish divergences smashed to bits, very important oscillator thrusts higher from previous oversold readings, trend indicators strongly spiking higher, and price launching off the 200 DMA and breaking up through old resistance to new highs all the while respecting existing channeling.
The bulls have everything going for them, don't they? Well, hold on to your horses: the DAX is now very overbought from several distinct points of view from the RSI, to the Full STO, to the +DI, to standard deviation readings above price norms to name the most obvious. Of course markets can stay overbought longer than you can remain solvent.
DAX Daily
The bearish divergences continue by and large intact on the weekly time frame however, including the very short term bearish divergences that have been erased on the daily (remember my SPX Divergences Study?), and the overbought extremes from a price deviation standpoint as seen via the Bollinger Bands are just as, if not more, evident and extreme than on the daily.
DAX Weekly
Moving out to the monthly time frame we see the same extremes in price and even more exaggerated bearish divergences.
DAX Monthly
Price extremes across all time frames with major longer term bearish divergences is my short version summary for the DAX.
Buying opportunity or selling opportunity? I'll let you decide, but I'll bet the response breakdown goes something like this: those who bought at the 2009 lows say it's a selling opportunity, and those who missed the entire rally are buying like mad with no regard what-so-ever to the question to begin with.
And the monetary authorities love it. After all, what better way to re-capitalize than selling fantasy priced junk to suckers!
Last week I said I was no longer looking for the “Big One” at that point in time and that I was looking for a reaction (which I sincerely thought we'd begin to see last week), but with the price action that we continue to see, I'm not only shifting back to “lookout for a major top status”, I'm also seriously considering forgetting about an initial reaction from highs and expecting a straight away crash. The bears have been crying market manipulation for how long now? How much longer until it's the bulls' turn?
-------------------------------------o-------------------------------------
Some more recent complementary evidence and opinions for my quick list, summary view.
Weekend Sentiment Summary
The Stream of Dismal Economic Reports Continues!
SPX Topping Valuations
Keystone's SPXA150R Indicator Signals Significant Market Top
Chart of the Day: Euro Area GDP
Late Ramp Pushes S&P To Close At Now Standard All Time High
Deja Deja Deja Vu - Final Hour Ramp Closes Stocks At All Time Highs
Charting Irrational Credit Bubble Exuberance Euphoria
