Technicals | Aug 09 2011
By Rudi Filapek-Vandyck
Charlie Chartchecker has been quiet this year, so quiet I cannot even remember when FNArena published his last market assessment, prior to today that is. This week we received an admission from Charlie he had been waiting for "developments" to take place, before delivering another technical assessment for equities markets.
The result seems to be a mixed bag, with Chartchecker grabbing the opportunity to point out that technicals and fundamentals have diverged in recent times. According to his own technical signals, which include a Fibonacci-based butterfly pattern, the underlying strength in US equities should be apparent, but instead it is fear and forced selling that is dominating markets, and the result is for sharply lower prices in the US market.
Let's first take a step back and see what Chartchecker's butterfly pattern looks like on price charts:
Reports Chartchecker: "The theory behind the butterfly pattern is price will move up from the zone marked by the red rectangle (A). Additionally, the green indicator signals at point B also a likely low-strength bullish reversal being established. This indicator has historically signaled reversals where the indicator-lines converge (as marked by the red circles for example). The indicator does not show price direction, but rather price strength-convergences. Indicator-line convergences at low points show high-strength pending reversals (C), and convergence at high points show a potential low-strength reversal (B)."
Underlying positive thus.
However, Chartchecker also advises investors should pay close attention to what's happening with crude oil prices, not just today or tomorrow, but in general ALWAYS.
This because, as he puts it, "Crude oil is absolutely the King-of-Commodities, forming a foundation of the world economy and politics. Virtually everything is linked to oil prices as economies and business are so heavily reliant. Oil’s ability to influence the price of other markets is supremely unassailable.
"As with virtually all essential commodities, oil prices tend move in the same direction as overall economic optimism. Popular stock indexes are widely viewed as the best gauge of market demand and supply because they encompass all major economic sectors. The larger the capitalisation of companies in the index, the better an indicator of overall confidence it tends to be, making especially the DJIA and S&P 500 a particular favourite barometer.
"Typically, the S&P 500 and other major indexes as a group tend to lead oil and other key commodities. The general rule is that stocks lead, oil and other risk assets like commodities or currencies follow. However if there is a sudden sustained price spike in oil two very important changes occur: (1) Oil becomes the prime market mover and (2) correlations between oil and other risk asset prices diverge."
All this leads to the suggestion that current weakness in crude oil prices now outweighs the bullish butterfly signal and that equities will take their lead from movements in oil futures.
As far as the pure technical analysis goes, Chartchacker predicts further corrections in equities will be on low strength or ranging price action as the indicator lines are converging at the top. "The indicator is not a directional signal. Price movement linked to a high-indicator-convergence is associated with low ranging low strength as per historically shown by the red circles" (on the daily price chart – see above).
Looking at the weekly price chart (see below) Chartchecker observes the weekly Fibonacci ratios for the bullish butterfly pattern equally remain in place, "but the indicator has yet to converge to show a point of cycle change. The drop came from a position of market strength as per the indicator converging at an apex at the bottom."
Charlie Chartchecker is the pseudonym of a 53 year old Project Director and Forensic Market Analyst with trading experience since the 1980's. All analysis, conclusions and views are his and not FNArena's.
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
