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Source: courtesy of The Chart Store

 

Its now show me time — heading into September, the worst month of the year — and what appears to be a tiring markets is likely to choose a specific course for the next few quarters.

Will it be a break out or a break down?

What Say Ye?

Category: Markets, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

51 Responses to “Double Top? Discuss . . .”

  1. jaymaster says:

    Up and out. We’ve turned the corner.

  2. philipat says:

    A ten percent or so correction would provide cover for the Chairsatan to act?

  3. Frilton Miedman says:

    I say the better question is whether the S&P “deserves” to be anywhere near it’s 2007 levels, a time when CDO’s representing trillions in MBS assets were thought to be “triple A”, unemployment was less than half what it is now and there was no talk of wealth/income disparity & consumer deleveraging.

    I don’t know whether or not we go higher, but I’m slightly more certain we’ll be lower at some point.

    We’ve had three distinct and rapid spikes since 2009, all three were QE driven, the last two ended in extreme nosedives for lack of economic fundamentals to match them.

    Are things rally any better this third time around?

    This isn’t a market of real growth, just a Pavlovian guessing game for the nest QE…circa 1966 to 1982.

  4. GCF says:

    I think Jim Bianco already answered the question. If Bernanke and Draghi deliver bond buying by the 14th then up. If not Woosh. Time for a SPY strangle?

  5. philipat says:

    “Are things rally any better this third time around?”

    Freudian slip, perhaps?

  6. RW says:

    I’m wary of the term but this does seem to be a “risk-on/risk-off” market based largely on central bank behavior and expectations of same so a significant question then becomes:

    Based on the best reads I have, the Fed is not likely to engage in QE3 this Sept but

    I don’t know if the Bernanke Fed is focused on the stock market to the degree the Greenspan Fed was so

    would that change if the market tanks, would the Fed then pivot to QE3?

    Don’t know but I do have some dry powder ready in case the whites of their eyes become visible.

    JMO, FWIW and YMMD (what else is new).

  7. CharlesII says:

    I think Frilton Miedman has the correct analysis. The market is being driven by factors that have nothing to do with fundamentals. It is moderately overvalued by historical measures, especially when one considers that the era of exorbitant American privilege is (slowly) ending. When it is truly over, PEs we have considered normal may no longer apply.

    See http://www.multpl.com/shiller-pe/

    The main risks are political. If Republicans were to sweep and enact the program they have promised to enact, a severe crash would be likely, since it would amount to something like a 6% decline in GDP. Even control of one house of the legislature or the presidency would probably guarantee a modest recession. A Chinese hard landing, a European breakup are possibilities, though I think that Merkel is starting to face reality with the nearness of German elections and France is already dovish.

    This is a market for speculators, not investors. Keep your hand in, but not beyond the elbow.

  8. b_thunder says:

    This summer reminds me of summer 2007 or 2008. The majority of the economic and other “fundamental” indicators again point toward recession, money managers know that, but hope that the Fed would step in to bail them out once again. We knwo how 2007 and 2008 turned out to be.
    The Fed has a lot more “bail out” experience now than it had in 2007/08, but i think the end result will be the same: the Fed can control neither the business cycle not the Congress/fiscal cliff/uncertainty. The Fed-manufactured rally will be smashed by the slowing economy, negative profit growth and (i’m going on the limb here) higher long-term rates that will cause another drop Y/Y in the housing sector before end of the winter

  9. Cassandrabelle says:

    The better question is does the market merit this artificial level in the first place? It’s already pumped on easing twists, not fundamental valuations.

    Bernanke has little left and knows it’s time for Congress to stop sniveling and do their jobs. No QE coming and the market will correct, which will be HEALTHY.

  10. Super-Anon says:

    “Will it be a break out or a break down?”

    Yes.

  11. philipat says:

    Regarding Shiller and CAPE, I like the approach BUT would be careful with it at present because this cycle includes TWO major bubbles (Dotcom and Financial, aka “The American crisis”) followed by major lows. Depending on how and when these are factored in can make a huge distortion to adjusted data.

  12. mathman says:

    i guess any pretense of “fairness” is pretty much gone:

    http://www.businessinsider.com/laid-off-us-workers-take-pay-cuts-at-new-jobs-2012-8

  13. Frilton Miedman says:

    philipat Says:
    August 26th, 2012 at 8:59 pm
    ” “Are things rally any better this third time around?”

    Freudian slip, perhaps?”

    ~~~

    Crap, You might be on to something, looks like everyone agree’s with me here, however, AAII Bull sentiment went up to 42% this week, maybe that means this group is a higher caliber.

  14. vachon says:

    Here’s my wooden nickel’s worth: I don’t think the Fed will produce another QE before the election. If Obama wins, then yes, we’ll get another. If Romney wins, no, the thinking being to let Romney have his tax cuts against a “clean” backdrop.

    But.

    The VIX has been at strangely low levels for a few weeks and it makes me nervous: this market can only sit and simmer for so long. Anything between now and November can set it off and it will be down, down, down.

  15. rp says:

    For whatever reason, I’m reminded of Bob Prechter’s chart:
    http://www.trade10.com/images/Dow-charts.gif

    Could this happen again?

  16. Petey Wheatstraw says:

    I agree with Frilton Miedman and Cassandrabelle.

    That said, I think there’s a good chance of a major correction before the election. It would spell big trouble for Obama, if some right wing lunatic/1 percenter decides to use the money he’ll never spend to change the course of the US, politically.

    This entire rally has been political (the picking of winners and losers), and a major player or players jacking the markets could spell real trouble for Obama.

    A Romney win would end up looking like the facebook IPO.

  17. blackjaquekerouac says:

    big win for Apple. “the war with Uncle Samsung” has begun. yet again we’re talking technicals…sure the market can correct…probably would be a good thing actually…but the fundamentals of the expansion remain in tact: interest rates at zero (!!), massive counter-cyclical policies from Uncle Salami, the biggest military engagement since WWII…if not bigger since we’re well past year 10 now, a huge entitlement in the form of the Affordable Care Act, cloud computing (100 billion dollar industry going all to the West Coast i might add), natural gas revolution (this one’s going global…the end of Wall Street as a power broker of any major consequence for decades in my view) and most importantly “solar power” which will change the face of the planet permanently once the dike is breached and the panels show up at Home Depot and Lowe’s. of course none of this “technical stuff” is ever mentioned here…why sweat the details?!

  18. lonr505 says:

    break up or break down, whatever happens twelve months from now the lots of folks in the stock blogsphere will say that this break out was “obvious.”

  19. gordo365 says:

    I voted with my feet. Sold my UWM (ultra russell 2000) on Thurs.

  20. nofoulsontheplayground says:

    The double top on the SPX was made with substantially lower volume than the initial high, so some back-filling should be anticipated if you are bullish. If the advance continues, the 1422 area will likely be back-tested on lower volume prior to a substantial extension higher. If the back test is on substantially higher volume, it’s a bearish sign.

    It is curious that a technical question relating to a chart fostered so many fundamental analysis responses, many with a clear bias.

    The Eurodollar futures pattern is still working, so I respect that.

  21. algernon32 says:

    The Federal Reserve’s centennial is right around the corner.

    Perhaps they will celebrate like it is 1913! An annual 6% vig for administering the worlds money supply seems reasonable to me. More printing = more vig.

    Gold seems to be expecting another round of QE.

    Nixon ended gold convertability 41 years ago.
    What was the average life expectancy of any fiat currency again?

  22. yuvalw says:

    This is the worng question imho, the question should be how you manage your risk.at this point? And this I ask you..

  23. PeterR says:

    New SPX election year top TBD above current mini-double top IMO.

    Barring a 2008 Black Swan meltdown (always a risk), election years trump Sell in May and Go Away.

    SPX triple top at 1550 +/- is not out of the question for 2013-2014 for Seven Year Itch Redux. [3rd chart at link above]

    Risk management suggests mostly cash now, but a move on volume above SPX 1400 could really take off in a startling Santa Rally, especially with further QE. Didn’t Romney/Ryan say they wanted to can Bernanke? “Print Baby Print” may be Ben’s response to save his job and Obama?

    On the flip side, a move under 1400 (SPY 140 and MA(20)), could accelerate to the downside and spoil a Santa Rally.

    After the election, all bets must be reconsidered in 2013.

    PS — 9/11 is a small short-term hurdle TBD.

  24. Gonzop says:

    ‘a break out or a break down?’

    it can be both – but again, on which timeframe do you operate?

    For the next three months:

    if they break out, it will only trap a few late bulls and make yet another weak batch of bears puke but ultimately it will fail. Then it’s all hard down until after the elections when too much fear and loathing meet a Fed fix (question mark) and up we are, a Santana rally

    (note that Goldman’s end of year target is unchanged at 1250 regardless of the path)

    Remember 2007? to many’s bewilderment the SPX managed a new high after a summer of fear and warnings, while Europe (i always follow Dax as an overall leading index) printed a lower high and all things brewed and pointed down like they are today. Gutfeeling tells we are doing exactly the same now.

    The warnings today: take a look at Shanghai, take a look at iron ore, take a look at Europe where crisis is only starting, not ending, take a look at Australian and Dutch housing nosing down to name a few recent issues, oil looks overstretched here, I am in Greece right now where noone wants to pay a cent of tax still, Greece has to leave the euro, the issue is not if but when, and US markets will be affected again by European snafu.

    It is like Frilton Miedman said here, comparing iso-price environments, 2012 and 2007 and this does not add up, this does not make sense. Europe and China will weight on SPX trajectory anyway if the fiscal cliff does not do the job itself.

    If you are holding longs or ready to punt on a break out, be quick to exit and ‘look out below’ (famous quote)

  25. Gonzop says:

    ‘a break out or a break down?’

    it can be both – but again, on which timeframe do you operate?

    For the next three months:

    if they break out, it will only trap a few late bulls and make yet another weak batch of bears puke but ultimately it will fail. Then it’s all hard down until after the elections when too much fear and loathing meet a Fed fix (question mark) and up we are, a Santana rally

    (note that Goldman’s end of year target is unchanged at 1250 regardless of the path)

    Remember 2007? to many’s bewilderment the SPX managed a new high after a summer of fear and warnings, while Europe (i always follow Dax as an overall leading index) printed a lower high and all things brewed and pointed down like they are today. Gutfeeling tells we are doing exactly the same now.

    The warnings today: take a look at Shanghai, take a look at iron ore, take a look at Europe where crisis is only starting, not ending, take a look at Australian and Dutch housing nosing down to name a few recent issues, oil looks overstretched here, I am in Greece right now where noone wants to pay a cent of tax still, Greece has to leave the euro, the issue is not if but when, and US markets will be affected again by European snafu.

    It is like Frilton Miedman said here, comparing iso-price environments, 2012 and 2007 and this does not add up, this does not make sense. Europe and China will weight on SPX trajectory anyway if the fiscal cliff does not do the job itself.

    If you are holding longs or ready to punt on a break out, be quick to exit and ‘look out below’ (famous quote)

  26. JasRas says:

    When I look at the index chart, it looks good as a point and figure chart. But if one starts drilling down, looking at sector and sub-sector charts, then individual stocks, one starts to see that these charts are extended and that some are starting to break down. Eventually that should feed up to the index chart because even the mega’s that have the most weighting are looking for a pullback. Oh sure, one can point to MSFT or INTC and show a perfectly healthy chart that is both good and not extended, but there are fewer of those charts and more of extended and topping charts.

    Doom and gloom? Who knows, but I for one am hesitant to think this is anything more than a trip back into the 1300′s… if it’s “perfect”, it’s to around the 1365-1375 area, but since I’ve noticed a lot of technicians seeing that area, I’m going to use a H. Meisler guideline, “if everyone sees it, it’s probably not going to happen that way”…

    So if everyone sees the double top, says “buy the dip” at 1365-175, it either won’t get that far or it will go to the 1325-35 area, scare the heck out of everyone and no one will buy there, then shoot back up prooving us all dumb once again.

  27. TLH says:

    Buy low, sell high. The question is-Will the government manipulate the market higher?

  28. Moss says:

    The expectations are that Obama gets 2nd term, and that QE3 is imminent. Should this change the money pouring out of China and Europe and into US will hesitate.

  29. sureseam says:

    If the bullish assessment is right then I wonder what is the adrenalin injection that will make it happen? Quantitative easing has had progressively less and less effect each time it has been used in places like the UK. Overpowering that diminishing aspect, does rather smell of possible hyper inflation which some appear to want.

    Frankly I think this is a double top and it would be interesting to see the graph shown with inflation neutered.

  30. machinehead says:

    Chart patterns mean little unless they are reduced to an algorithm and tested.

    This has certainly been done for support and resistance breakouts. If I recall correctly, the Turtles trading system made use of them.

    Just staring at charts looking for patterns doesn’t work.

  31. jacobsk says:

    It’s a double top only if the market goes below the 1250 level. I would say , this is resistance and the s&p500 could go to the 1300 area (+- 25) .

  32. dead hobo says:

    BR vacillated:

    Will it be a break out or a break down?

    reply:
    ———–
    Why are you asking me? Computer programs do most of the trading. Asset managers who have to be in the market do the rest. Computers will always be in the market until liquidity is removed. Then they will reappear when liquidity is restored and the market will rise until liquidity is removed once again. Asset managers need to be in the market (except for Doug Kass apparently) to justify collecting asset management fees and to brag about being smart if the markets go up.

    I suppose old timers like Jerry Siegel and John Bogel who think nothing has changed in 20 years are also trading a little. I ignore them and people like them because they are only living their memories.

    All algos know is technical trading. They are the physical embodiment of magic charts. Do what they do, only try to do it before them.

    I’m putting cash into a long term bond fund. I think the mother of all long term UST rallies is coming thanks to Europe and China, and there’s still room for a few percent in capital gains. Bernanke isn’t burning the brightest bulb, but I really hope by now he understands the relationship between inflated oil prices and QE and how sticky oil prices completely undermine the positive effects of QE.

  33. dead hobo says:

    I said:

    Asset managers need to be in the market (except for Doug Kass apparently)

    *** Or was that Gartner? I get them confused a lot of the time. One of them is out of the markets for now.

  34. Robert M says:

    Keeping w/my Prechterian thinking I’m w/ rpSays. I thought we had gone into a seven count back (5) to end the move and it just kept going. A nine count, which is what this looks like are historically around political events. This thinking has kept me on the sidelines and out of the move since June 1st and some money. I still prefer the sidelines to this.

  35. wally says:

    How long now have we been told that this is an ‘unloved’ rally, that prices are too high, that there is no ‘fundamental’ support?
    Well, it’s always the unloved markets that go the highest and a lot of money has been made in this one.
    Double-top, double-schmop. So what?

  36. Greg0658 says:

    “All algos know is technical trading. They are the physical embodiment of magic charts.”
    not necessarily so (imo)
    some super-connected-super-computers are better than others
    put another way – sorta like that WPT videocamera on the edge of the table that sees your inhand cards

    we’ve gotta get folks back into real GDP endeavors for the jobs – hense less recreation
    gotta be PC – do no harm – HAL9000 – so fragile

  37. The answer is obviously the least-taken path and contrarian: Neither.
    It’s a sideways market and it will move up and down. The only thing that differs is the amplitude (or volatility) between peaks and troughs.

  38. Question: IMO technical analysis does not work. You can’t stare at a chart and see some future pattern, only a past one. So, with HFT’s trading on TA or charts, does that mean TA DOES work now?

  39. socaljoe says:

    Will it be a break out or a break down?

    The correct answer is “I don’t know”.

    Anything else, you’re either trying to fool yourself or someone else.

    If your investment strategy depends on the correct answer to this question, you’re asking for trouble.

  40. farfetched says:

    It will do what causes the most pain for the most retail investors. It will go higher until the MSM announces how warm the water is, lures as many suckers as possible, then they’ll spring the trap like they always do.

  41. Double tops in up trends break to the upside most of the time because up trends tend to continue…until they don’t.

  42. rootless says:

    CharlesII wrote:

    I think Frilton Miedman has the correct analysis. The market is being driven by factors that have nothing to do with fundamentals.

    I think that is true up to a certain degree. It works like this until illusory market expectations are not any further reconcilable with reality, after the two diverging too much. It’s very difficult, if not impossible to predict when this point will be reached, though.

    This is a market for speculators, not investors.

    I love this market.

  43. Tamu82 says:

    I goby CLOSES. Until SPX closes above the 1419 high (not just intraday) I see a pullback coming. It shuldn’t be the BIG ONE just yet thanks to the Fed — but — I expect a retracement back to at least the 1360s. After that, the 1330s offer support, and then 1290-1300 is major support.

    80% of presidential election years since 1950 (except 1960, 2000, and 2008) were positive years for SPX. Investing is about probabilities and this is a pretty strong one OUTSIDE of some Black Swan event.

  44. dead hobo says:

    chrispycrunch Says:
    August 27th, 2012 at 11:31 am

    Question: IMO technical analysis does not work. You can’t stare at a chart and see some future pattern, only a past one. So, with HFT’s trading on TA or charts, does that mean TA DOES work now?

    reply:
    ———-
    TA works only if everyone believes in it and all follow the same rules. Computer algos are programmed to follow TA rules, thus, TA is the rules of the road for algos. Fundamentals don’t matter except to the headline algos. Real people put fundamentals into perspective. Algos use TA and chase price and history only, which is ultimately stupid since price will ultimately bear little to no relationship to reality. Only pundits will claim the market knows all and discounts all. But the fastest computer wins in this scenario. The poor sap who bought last to hold is the loser.

  45. Brent_in_Aurora says:

    Higher as the bond market has no return.

  46. brianj997 says:

    The Short Interest is at highs for the year +20%. This is typical of bottoms, not tops. If we are going to go lower then it would seem to logical that we would have to have at least one more good short squeeze before we do so … another leg in the maket you might call it. The markets typically don’t let too many be positioned on the right side of the market at market turns.

  47. bear_in_mind says:

    Do technicals matter in an era of QE bazookas and HFT bots?

  48. Sun Tzu says:

    Buy the big dip

  49. Sun Tzu says:

    Buy the big dip

  50. JasRas says:

    Algo trading is just a replacement “herd”. They trade on the “vote” not the “weight”, so a human active manager has true opportunity to create alpha.