Dear PGM Capital Blog readers,
In this midweek’s blog edition, we want to highlight some of the most important events for the week of August 4 and August 8, 2014.
- Stock-market Correction
- Must see internet links
- Technical market outlook
Stock-market Correction
We are witnessing a stock-market correction that started around July 24, 2014, which typically coincides with the cyclical historic moves in the markets. We also warned of a coming correction and possibly a crash at a later stage before. Below you can find the seasonal cycles chart for the Dow Jones and S&P 500.
In above charts we can see that from more then 30 years historic data the US equity markets top out in the summer (July – August) and then is followed by a correction in the late summer and autumn months.
To get some global perspective on this we added the seasonal DAX chart below.
In the seasonal DAX chart we can see the summer correction in an even more dramatic way starting at the end of July and finding its bottom in the beginning of October.
Below we can see the performance of some important global equity markets since July 23, 2014:
- Dow Jones -3.85%
- S&P 500 -3.36%
- DAX -5.78%
- FTSE 100 -1.70%
- Nikkei 225 -0.05%
- Hang Seng +2.82%
- Bovespa -2.12%
Due to the fact that the valuations of the equity markets of emerging economies are very low, it is logical that the current correction is much stronger in “western” markets then in emerging markets. On a year to date basis most equity markets are slightly negative.
Certainly global macro events will always have an effect on traditional market outlooks, but on the background of these overvalued equity markets and the outlook of quantitative easing to end in October with a possible interest rate hike by the end of the end year or the beginning of 2015, smart investors are getting increasingly cautious, but there will always be investors that look at this as a buying opportunity and there is a high chance that we might see a retest of previous equity market highs before the equity markets will go in a longer term bear market.
Must see internet links
Please take your time to read/watch the following links that we have posted below.
- These are three big risks to the market
- George Soros sells all shares of Citigroup, Bank of America and JP Morgan
- Soros and Paulson Are Buying and Holding Massive Gold Positions
- Global bonds rally as investors seek safety
- World Events Mean Deflation First, Then Inflation
Technical market outlook
This week we will take a look at the equity market and we will use the Dow Jones to represent the “western” equity markets. We already mentioned that we are in a equity market correction and there is a high probability that this correction will take 2-3 months (see above seasonal charts). Now we will try to answer the more important question what might be the target for the bottom and what might be the technical trigger for a more severe correction or even the start of a stock-market crash.
For this analysis we will take a look at three technical timelines, the monthly, weekly and daily chart and will use moving averages, trends and important support levels.
First we start with the most long term chart, the Monthly Dow Jones chart. Click to zoom.
The monthly chart is usually used to predict multi-year trends. In the monthly chart we can see that due to a very aggressive bull market in recent years there is quite a lot of room to correct to the downside without any important bearish technical signs to be triggered, but this also shows technical signs that the Dow Jones is becoming overbought in the long-term.
If we look at the chart we can see the grey trend lines (channel), which represent the trend quite nicely so the upper trend line will be resistance and the lower trend line will be strong support. The first moving average that is important for us is the blue 20 SMA (Simple Moving Average), this is the first potential support that the Dow can hit in this correction. Right now the 20 SMA stands at around 15620, but it will move higher every month and it will be around 16000 in October 2014. This dynamic support level will catch up with the actual prices quite soon and the last time that the Dow Jones went below the 20 SMA was 2 years ago and the possibility that the Dow get below the 20 SMA levels can be considered high.
What will be more crucial is to see if the Dow Jones will close the month below the 20 SMA or if we see a sharp rebound and a close above the 20 SMA again.
Next up are the very important previous lows and these are called static support levels. The first static support is at 15340 and then another one at 14720. A very important key support level is at 14200, which marks the high before the dramatic financial crisis in 2007/08.
Then we have two more important Moving Averages the 50 SMA (green) and the 200 SMA (red), these are the long term moving averages and are rarely broken. Usually when these two levels (50 SMA & 200 SMA) are broken we can assume that the Dow Jones is in a bear market or a crash event is underway or has happened.
Here the short summary for support levels for the Dow Jones on the monthly chart:
- 20 SMA @ 15620 (Dynamic)
- Previous low (Feb 2014) @ 15340
- Previous low (Oct 2013) @ 14720
- Support trend line @ 14600 (Dynamic)
- High before financial crisis (Oct 2007) @ 14200
Now lets take a look at the Weekly Dow Jones chart to determine mid-term support levels. Click to zoom.
The weekly chart is usually the most important chart to predict multi-month trends, which most investors and traders use for their long-term horizon.
Looking at the weekly chart, the picture for the Dow Jones changes a little and shows that support levels are getting closer and the technical conclusion can also be slightly different. In the weekly chart the Dow Jones already closed below the 20 SMA and is looking towards the 50 SMA which was last broken in December 2012, but a strong rally has followed that event and therefor the 50 SMA is already an important support level to look at.
The current channel (grey trend lines) on the weekly chart is in tact since August 2011 and will be a strong support level to look at.
Here the short summary for the support levels for the Dow Jones on the weekly chart:
- 50 SMA @ 16160 (Dynamic)
- Previous low followed by an OKR (Outside Key Reversal) @ 16015
- Support trend line @ 15660 (Dynamic)
- Previous low followed by a bullish hammer @ 15340
Now we look at the Daily Dow Jones chart to determine the support levels in the weeks ahead. Click to zoom.
The daily chart is used to predict multi-week trends and is also the most important technical chart for technical analysis. Looking at the daily chart, we immediately see that the overall picture looks more critical. The Dow Jones has already broken the 20 SMA and 50 SMA and is very close to the important 200 SMA. The Dow Jones is also getting close to the support trend line that was set by previous lows.
There is important support around 16300 from the support trend line and the 200 SMA and if these levels will not hold and the Dow Jones closes below these levels, we might see further downside to 16000 and potentially to 15400.
Below the summary for the support levels for the Dow Jones on the daily chart:
- 200 SMA @ 16330 (Dynamic)
- Support trend line @ 16290 (Dynamic)
- Previous low @ 16005
- Previous low @ 15340
- Previous low @ 14720
It will be very interesting to watch the daily chart in the coming days/weeks and we can expect more corrective downside movement until the end of September 2014. We are expecting a correction in the 15500 (±200) region. If the correction will be stronger or the Dow Jones is not able to get in any higher highs (above 17130) in the next 6 months, best case scenario we can assume the bull-market is running out of steam or worst case scenario that we are entering a bear-market (with a possible stock-market crash).
If the Dow Jones will respect the support levels around and below 15500 and we see a strong rally coming out of this correction towards the end of the year with possible new highs, its safe to assume that the equity bull-market will continue a little longer and this correction was only a cyclical event.
We advice to be cautious to enter the US and European equity markets at the moment and wait for clear signs and confirmation that this might only be a mid-term correction. At the moment there is better value in other asset classes. For more information on investment opportunities in these critical times, please don’t hesitate to contact us and feel free to make an appointment.
We will have a close eye on these developments and keep you informed at important developments or changes of this outlook.
Last but not least, before following any investing advice, be aware that above outlook is of pure technical nature and does not respect any global macro events that will disturb this outlook. Please always consider your investment horizon and risk tolerance and financial situation.
Yours sincerely,
Michael Panneflek