The publication for trading and investment professionals

eNewsletter

31 August 2011

The Global Bear Market

We are in the early stages of a global bear market in equities, according to Paul Desmond of Lowry Research. Desmond has told the Technical Analyst that classic warning signs of a bear market were in place for months in advance of the spring highs for Germany, UK, Taiwan, Brazil and Toronto. “In fact, similar signs of weakness are apparent throughout the 25 plus markets that we cover and multi-month advance-decline line divergences have been observed in several major markets. The bottom line is that the global markets appear to be in the relatively early stages of bear markets, calling for heavily defensive positions.”

Lowry Research does not cover the emerging markets, but Desmond thinks “it will be difficult for those markets to prosper in the face of bear markets throughout the developed markets.” Read report >

Jeff Hirsh, editor of the Stock Traders Almanac, broadly agrees that we are “in an entrenched secular bear market in stocks, which will last for another 5-10 years, and that in the short-term a return to 10,000 remains a distinct possibility.” Longer-term, however, he offers a more optimistic outlook. Hirsh thinks the Dow is going to 38,000 and in his new book, “SuperBoom: Why the Dow will hit 38,820” (Wiley), he discusses why, based on the market cycles of George Lindsay, the Dow will reach this target by 2025 (see chart below).

End of the Road for Gold?

Cliff Green Consultancy, a research firm specialising in technical analysis of the commodity markets, has told us that the longer-term uptrend in gold is undisturbed despite the recent declines (Chart 1). Nevertheless, the sharp upward acceleration and subsequent volatility is consistent with a bull cycle entering its final stages. The firm sees a challenge of uptrend support in the $1500 region in the weeks ahead. Cliff Green can be contacted at: www.cliffgreenconsultancy.com.

Alex Kazmarck, chief analyst at Vanguard Axis in the US says, “Our expectation is that the problems in the Eurozone will cause global equity markets to fall, which will help gold rally to new highs. As gold has been the safe haven choice during times of uncertainty, investors may push gold above $2,000 per ounce as panic selling ensues. Looking at the shorter term picture, we think the rate of appreciation will not be sustainable in the coming days and a head and shoulders formation is currently forming (Chart 2).”

Ian Gordon of the Longwave Group, an advisory firm based in the US, likewise sees a connection between equities and gold. He says that gold eventually sells off after a sharp decline in equities as happened in 2008. He predicts that gold could go as low as $1200 based on an Elliott Wave target for the Dow to below the March 2009 low by September of next year.

For Ron William, Technical Strategist at MIG Bank, "Our key level is at $1600. A sustained weekly close beneath here would place Gold's mountainous peak at risk for an even larger avalanche decline." See Ron William's in-depth report >

The German Economy: Last Hope or Last to Fall?

There was much talk only a month or so ago of Germany’s outperformance and how its manufacturing exports to Asia have kept it out of the European quagmire. Until, that is, they posted a 0.1% GDP figure for Q2 2011. Now, everyone is talking about the party being over.

So what is the technical picture for German equities?

Paul Desmond at Lowry Research says that the outlook for German equities is just as bearish as it is for other developed equity markets (see above). Using Lowry’s breadth indicators, he notes that negative divergences have been evident in the Advance-Decline Line and Cumulative Net Volume Line since February 2011, implying demand has been growing weaker and more selective (Chart 1).

Remy Gaussens, Head of Techical Analysis at TRADING Central, goes further and thinks the DAX is likely to underperform significantly:

“The DAX underperformed the S&P and the FTSE by approximately 25% over the last month’s collapse and we expect this underperformance to continue. The DAX / FTSE ratio has been seesawing between 1.25 & 1 since 2006 and we expect it to reach parity in the coming months. For the US, the DAX / S&P 500 ratio fell sharply from its top at 5.7 in August 2010 and is expected to reach 4.3 in the coming months. To sum up, in comparison to the S&P 500 and the FTSE 100, the DAX is a good-to-short index in order to benefit from the current bearish trend.”

Riccardo Ronco, Director of Technical Analysis Research at Aviate Global in London, agrees. He compares the MSCI Germany Index versus the MSCI World Index (MXWO) on a dollar adjusted basis (Chart 2) and points out that, “the relative strength of Germany vs World is almost at its worst level since the summer of 2010. More importantly, on a relative basis, Germany has already taken out its March 2009 lows back in 2010. With a possible new bear market in place and with all the technical intermarket forces lined up as in 2007-2008, I am confident to say that German stocks will underperform global equities.”

Focusing in on the technical picture for the DAX (Charts 3 and 4), Ronco says we may first experience a two to three month correction before the next big move downwards:

“The cyclical bull market started in 2009 and ended with the breakdown of the 2009 support trendline. There is a compelling case for a repetition (on a different scale) of what we saw in the previous 2007-2009 bear market. More precisely I see the markets repeating now the Q1 2008 pattern: first a massive sell-off ending the previous bull market followed by a 2-3 month relief rally and then a new move to the downside.

“We are now clearly in a short-term oversold condition that requires a relief rally to be confirmed by weekly indicators like the classic MACD. We do not see such a medium-term buy signal at the moment, although one can reasonably expect a March 2008 bottom like pattern forming in the second half of September 2011. A possible rally should target 6200-6500 before seeing the August 2011 support line strongly challenged. It’s possible the DAX will move in 2012 to test the March 2009 low, but it should hold that level.”

Gaussens comes to a similar conclusion, albeit using a different approach (Chart 5):

“The outlook is bearish and we don’t expect any significant recovery in the coming months. Indeed, the weekly MACD validated a bearish divergence and is not posting any reversal sign, thus the downside potential is not exhausted yet. In the meantime, the weekly RSI is oversold which is limiting the downside potential. In addition, except if we suffer another strong bearish acceleration, the weekly RSI will certainly post a bullish divergence and this will potentially favour a limited recovery around 4525. Our next downside targets are set at 5100 and 4525 (equivalent to the 1020 and 940 key thresholds on the S&P). Only a downside breakout of 4525 would open the way towards 3666. On the opposite side, the 6500 resistance maintains downside pressure. An upside breakout of this level would pave the way for a direct rise towards 7000.”

Don't miss the Technical Analyst's 6th Annual Automated Trading Conference on News & Sentiment Trading, 22 September, London.

Automated Trading Conference: Lead Sponsors

T: +44 (0)1483 573150 E: enewsletter@technicalanalyst.co.uk

© 2011 Global Markets Media Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by an means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of Global Markets Media Limited. While the publisher believes that all information contained in this publication was correct at the time of going to press, they cannot accept liability for any errors or omissions that may appear or loss suffered directly or indirectly by any reader as a result of any advertisement, editorial photographs or other material published in The Technical Analyst eNewsletter. No statement in this publication is to be considered as a recommendation or solicitation to buy or sell securities or to provide investment, tax or legal advice. Readers should be aware that this publication is not intended to replace the need to obtain professional advice in relation to any topic discussed.