The media was all abuzz this week with the “New Highs” made by the Dow Jones Industrial Average which climbed above its peak of late 2007. Less noise was made about the fact that the S&P 500 and Nasdaq have not made new highs, perhaps because people prefer to hear the good news.
It is important I believe as an analyst and trader (or investor) to separate the fact from the fiction, because very often the financial media blurs the line between the two. The fact that new highs were reached in the Dow was widely interpreted as meaning that we should expect further bullish moves from the market. This is a mistake. The fact is that new highs were reached. The idea that this means that we should “turn bullish” is not only fictional, it is deeply flawed.
Of course the new highs in the Dow are exceeding a peak of almost six years ago (six-year cycle anyone?), but there is also a shorter term drama playing out, which has new highs in all US markets. What do these new highs mean? I have been reminded often recently of the market situation in late 2007, and to explore this idea I would like to draw your attention to what “new highs” meant in 2007.
Note the sequence of three bullish 18-month cycles, the straddled trough of August 2007, which implied fairly symmetrical price action around that trough, and the new highs made in October of 2007. I don’t need to tell you what those new highs meant. Here is what is happening now:
The similarities are clear. Price action surrounding the trough of November 2012 is stretching the definition of a straddled trough to its limit, with price now about 5% higher than the peak before the trough, but the Nasdaq is still showing a very likely straddled trough:
And so what do New Highs mean in terms of looking ahead? New Highs more often occur at or near peaks in the market, and their implication is not bullish, but bearish.
We have been watching two analyses in the US markets for the past few months. Both analyses are still valid, but the move up this week relegates the analysis I have been presenting on the S&P 500 to the less-preferred position. It is still not ruled out however, and we need to be aware of the danger it presents, which is a strong move down into late April this year:
The analysis I have been presenting in the Nasdaq is the more likely analysis for the US markets. I suggested last week that price would bounce off the 20-week FLD as it climbed out of the 20-week cycle trough, and that is indeed what it has done. That 20-week cycle trough still qualifies as a straddled trough, and we must be wary of the potential of a hard fall into the 40-week cycle trough expected late May, with an intermediate 80-day cycle trough in April.
There is nothing to add to last week’s comments about the Euro – it is still heading down to the 40-week cycle trough. Here is slight variation on the analysis I presented last week which suggests that trough might occur a bit later, in mid April.
The bearish pressure on Gold has been strong. We are still expecting the formation of the 20-week cycle peak in April, but as mentioned last week, it might be a disappointing peak.
30 Year US Bonds
Bonds continue to look very bearish. It is possible that the peak in late February was an early peak of the 20-week cycle, but it is more likely that we will see the formation of that peak in April.
Crude Oil is approaching the 18-month cycle trough. We need to be on standby to go long for the bounce out of that trough, but beware the false bounces that will occur as the trough approaches. Notice how price has climbed up to the 20-day FLD which would provide resistance to a false bounce out of a premature trough.
US Dollar Index
The US Dollar has continued to soar out of the 18-month cycle trough of early February. A 40-day cycle trough is likely to be hidden, and the first trough we will be able to identify will probably be the 80-day cycle trough expected in April.
Being able to separate the fact from the fiction, the truth from the noise, is very important to a trader or investor. I hope that this blog helps you to avoid misinterpreting the meaning of new highs. To “turn bullish” now, or to think that just because the market has been going up, it will continue to do so would be foolish. And you know what they say about a fool and his money!
Have a great week and profitable trading.