Is It A Bottom?

I’ve decided to break this out as a stand along posting. The question is simple:

Is the SPY S&P 500 looking like it’s done going down now? Has the recent run up been a ‘counter trend rally’ or the start of a ‘new bull run up’?

This is a particularly hard call to make, as it’s a particularly difficult time. News Flow is a strong mix of positive earnings and positive fundamentals for selected businesses and sectors, this is mixed with negative outlook from many, earnings misses from others, and general manic depressive cycling out of Europe on how much good money they wish to throw after bad into the PIIGS “social welfare” states.

Add in that the USA does not yet really have any clear prospects of getting employment up, taxes down, and businesses back to growing (other than selected exporters) and it’s just not clear where any money is going to come from to support more buying by the consumer. Printed money just reduces the size of the savings and equity of those folks who make up the most of the buying public. (For the first time ever, the Baby Boomers are headed to retirement, not more earnings, so reduction of their savings and retirement packages are NOT going to increase net spending…)

So can we see anything in the charts that helps us to select which bits of these stories matter?

These charts are live charts, so will change over time:

SPY 5 year weekly tick mark chart

SPY 5 year weekly tick mark chart

OK, this is a very slow chart, so will turn positive rather a bit after the actual turn. I’m “OK with that” as I’m interested in being “Late in, Early out”. Does it have anything positive to say?

Price is below the SMA lines ( 20 steps of 5 day weeks, or 100 days. So 100, 200, 300 day SMA stack). Price is returning from below. That’s a negative sign, but prices have to cross over the SMA stack and return to it from above to be a confirmed positive direction. For now, that’s still a “counter trend rally”. We’re pulling away from the lower Bolinger Band, a positive sign. RSI is nearing 20, but didn’t get there, a slightly negative sign. For this long a term, it ought to get to near 20 for a reversal (but RSI is not always enough alone). The longest term SMA line is still sloping up, but the faster lines are looking more like a crossover to the downside happening. Mixed at best. Ambiguous comes to mind. If prices fall away to the downside, we’re getting a confirmed downturn. If prices punch back through, it was just a ‘strong correction’. Sigh.

MACD is clearly below zero, so still saying “bear market, stay out” but is setting up for a crossover to ‘blue on top’ for a long term trade trend up.

DMI is ‘red on top’ but the red has crossed under the ADX black line. Blue is inflected up and red in inflected down. That crossover is often seen before a major reversal.

All in all, a bit ambiguous, but saying that at least in the short run, things are due for a bit of a positive trend. (Not a big surprise as we’ve had about a 10% rise in the last month or so).

BUT, in the context of an already established downtrend, it’s not enough to say ‘bear phase is over’. Just showing a bit of promise. If we move into a faster chart (daily tick marks) can we see an earlier shift to a positive run? Enough confidence to get off the sidelines and make some ‘swing trades’ and maybe even some ‘bottom fishing’ buys and hop on some ‘momentum’ stocks?

SPY 1 year daily chart

SPY 1 year daily chart

Well, yes!

First off, RSI has touched 20 and had a ‘higher low’. That’s a ‘reversal’ on this time scale.

MACD is not only ‘blue on top’ but also ‘above zero’.

The two of them together gave a nice “buy now swing trade” call about that last deep bottom at the start of the month. (Unfortunately for me, I was distracted by some work issues about then… so didn’t get a trade on).

DMI has gone to ‘blue on top’ as well. A nice confirmation. But ADX is still low, so strength is weak.

Prices have crossed over the SMA stack, so now we just need to have it return to the SMA stack from above and fail to punch back through. We don’t yet have a reversal of the SMA stack, so that’s not a positive sign.

In Conclusion

At the moment, it’s not yet a confirmed reversal.

There are some positive signs. Some nice “swing trade” indications.

There is enough to trade on a daily chart, not enough to ‘buy and hold’ for the long term. Perhaps enough for selected companies and sectors that have enough ‘momentum’ to beat any secular downtrend that might persist. Enough to trade, not enough to commit. Yet.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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19 Responses to Is It A Bottom?

  1. Greg says:

    Looks like the Mob money or something is buying. One last big move up and then the crash to 3000-4000 comes?

  2. R. Shearer says:

    Technically, it seems we’re still at resistance. The price move up from the low has been impressive except for lacking volume.

    Fundamentally, Europe is key. I’d like to get more bearish because I think their situation is dire, but bear markets often die in October.

  3. George says:

    There’s been some pretty disappointing earnings news in the past week. My guess is the market will simply limp along sideways for a while. There just isn’t anything happening to push it up unless you have Federal Reserve money being pumped in from a back channel someplace to buoy the market.

    The smart money seems to be buying bulk farmland in the US Midwest.

  4. George says:

    Well, this is worrisome:

    http://www.zerohedge.com/news/guest-post-boots-ground-china-signs-slowdown-are-obvious

    Looks like the housing market in parts of China is in free fall, too. All those ghost cities are probably having their expected impact.

    I wonder how that is going to play out on global markets.

  5. Pascvaks says:

    “What the World needs is a good, old fashioned sense of direction!” (And I don’t see anything in my tea cup that indicates it’s going to get one any time soon.)

  6. E.M.Smith says:

    @R. Shearer:

    I think that about sums it up. I looked at volume. Relatively light compared to recent volume in the down phase, but higher than volume during the last tops. Again an ambiguous state. I could easily see this market staying a ‘sideways roller’ for a while. We’re headed into an election year, so as that process drags out, things often just slide sideways waiting for The Answer. In those cases it becomes a stock by stock / sector by sector traders market.

    @George:

    That, IMHO, is the basic problem faced by all of the world (markets and economies): From where will the money come?

    China? Demand for exports is down. Hold a lot of cash but not spending it, just sitting on it or buying hard assets and land.

    US Consumer? Home ATM is gone. Trying to stay above water. Many without a job or income.

    Europe? The PIIGS are way past ‘tapped out’ and they have even loaded up the German Credit Card to the point of no return.

    Latin America? Without China buying raw materials, where is their ‘economic boom’? Yes, China is still growing, so there is some hope, but it’s growing on a slowing scale… Add in that much of Latin America is heading back to try the Socialism Shiny Thing (Again…) and I’m just not seeing it as a spark plug of wealth creation.

    Australia? Similar issues to Latin America. It’s all China driven.

    India? The domestic market is a still small. International is limited. Doing well, but not enough to be the ‘fix’ for Europe and American absence.

    Russia? Holding steady, but with resurgent nationalism and a tendency for wealth to be confiscated if you don’t do what Putin wants, not exactly going to fix the ills of Western Capitalism…

    Japan? Just trying to hold on long enough for a massive retirement generation to discover that they don’t get quite what they expected.

    The “Muslim World”? Too busy killing off dictators (and each other) and with the oil wealth largely in the hands of a few who either spend it on US Treasuries, a royal lifestyle, or funding wealth destruction via wars and terrorist campaigns. Not exactly a great creator of things nor improving economics.

    So just where will all the wealth creation come from? Where will the money flow arise to keep the USA clicking along and let Euro-Socialism continue to live the high life? Globally we have too much tax-and-spend and not enough ‘wealth creation and investment’. What there is, is way too messed up in the distribution. Wealth creation in China (feeding a few mega-rich) with consumption in Europe and the USA; but no method for the money spent to return to circulation in sufficient quantities. Eventually the money flows plug up and things grind down…

    Basically, the China Story has been more about wealth TRANSFER from Europe and the USA to China than it has been about wealth CREATION. So with the emphasis ever more on consumption in the USA, Europe, and the Neo-Socialisms around the world, there has been the inevitable imbalance of consumption demanded (just about everywhere) vs the wealth being horded in China. That story was fine as long as we had the fantasy that China would become a market for USA and Europe; not so fine in the face of Chinese Mercantilism and failure to recycle dollars and euros. When China has stopped being a dream of giant markets, what will be left?

    Put even more simply: IF China has a slowdown, the Euro-American dream of Chinese markets dies of the plague.

    Presently the fantasy is that China will join the European Financial Stability Facility (EFSF) and help bail out Greece, Italy, etc. Socialist failure always goes looking for fresh blood and money to pull into the Ponzi Scheme when the inevitable happens and the overspending catches up to the under production. I think that is a pipe dream. China may contribute a tiny bit, just to make it look like they are being involved, but they will not let their treasure be drained so that Greeks can live “In the style to which they have become accustomed”.

    Basically, the PIIGS having consumed their own wealth, and having bled Germany to the limit, are now looking to suck back the money spent in China on manufactured goods so they can recycle it via a gift or loan.

    The real solution is to get the Yuan to appreciate (A LOT) so other economies are viable to manufacture their own stuff; to get the Euros and US Dollars stuck in China back in movement (via the formation of that actual market for Chinese Consumption of international goods) and to simply admit that there are not enough tax paying bodies to support all the Socialist Dreams promised to folks in the Euro Zone (and eventually in the USA as well, as Obamacare and Baby Bush’s Drug Plan coupled with Social Security and the Demographic Bomb slowly bankrupt the place).

    Most of the medical care consumed in a lifetime comes in the last decade. The first of the Baby Boomers are just starting to reach that point. We’ve got a Medicare / Medicaid / Part B / Obamacare time bomb ticking… and we’ve sent our manufacturing tax base to China. Good Luck with getting it back…

    But all those things play out over decade time scales. You can still have yearly time scale positive market runs… and there are still some companies that can make the fantasy work. (Asians just LOVE Kentucky Fried Chicken, for example, so KFC will have a China Market story. Similarly, Tiffany and Coach will sell well in China – despite a billion counterfeit copies… so it’s going to be a ‘pick by pick’ thing.)

    IMHO, one of the more problematic bits is that China is a major player now in many markets, but plays by quasi-central-planning rules. Take copper, for example. Stockpiles go way too high in booms as the clerks are admonished not to run out, then nearly liquidated when things slow down. Not the normal type of hedging behavior of a collection of independent buyers and sellers working to stabilize their pricing plans. So we’ve got large swings in copper prices and production. Nice for trading. Lousy for investing. (One bit of ‘news flow’ right now is that China is way too low on copper inventory so it must be time to buy copper. We’ll see… but we need an economic recovery for the demand to pick up. FCX has a strike at their Indonesia mine, but is being bid up on the China Story. Not liking that story driven behaviour… ) Basically, trying to “game” the Peoples Central Planners driving a quasi-capitalist manufacturing base is not my idea of a sound investment plan.

    So looked at on a very macro level, I’m just not seeing how the global economy gets out of the imbalanced state without China changing policies to those that are less favorable to China… and we know that’s not going to happen… And I’m not seeing how the Euro Zone stabilizes without the PIIGS accepting a lifestyle about 1/2 to 2/3 of their present one. Not seeing that on the cards either. Add in the USA in a long slow slide into Socialized Medicine and Socialized Retirement, but without the “makers” to support it… and I’m not seeing how THAT is going to be a positive thing, either. Finally, we’ve got a Muslim world just full of a young hungry population; but not interested in working in Chinese factories; so looking to blow things up instead. It just smells like ‘explosive mix’ to me. The ‘fix’ tried to some extent in France and England (import the muslims) has not worked out so well. And once at 50% of the population they are going to vote for Sharia and NOT vote to continue to fund that Western Retirement Plan…

    All in all, The Dismal Science is looking a bit dismal around the world at the moment.

    Now if we could just get some free market capitalism running and get government problems out of the way of wealth creation; we could get more of those unemployed folks working and start a virtuous cycle of wealth creation… More makers, fewer takers.

    Oddly, one of the consequences of Market Socialism (or “Crony Capitalism”) is the concentration of wealth in the hands of the few. The same Monopoly and Oligopoly problems that have always plagued capitalism; but with the threat of competition removed and with the ‘winners’ chosen by planning committees. The Third Way. It works very well at making those industries wealthy. It still does not solve the wealth disparity problems… So oddly, the folks who most complain about wealth concentration advocate systems that lead to even more wealth concentration ( the limit case being state ownership of everything where control of wealth is concentrated in the hands of the government leadership). Oh Well… people have never been known for consistency of thought…

    Where will it all end up?

    Hopes and fears…

    I hope we get back to global growth and a capitalist basis; but the present trend is toward ‘market socialism’ and I fear there is going to be a ‘war of last resort’ out of the stresses. So far, every Third Way or Socialist or Fascist (a kind of socialism) global push has ended in a world war or cold war. I’d like to think we can get off this particular wheel… but I’m not seeing evidence for that happening.

  7. R. Shearer says:

    Well, I guess there is no longer a question about breaking through resistance.

  8. George says:

    Am I the only one skeptical of the “Greek haircut”? I see it as a solution to the immediate problem but does nothing to address the more systemic problem that caused things to get to this point. The people are still not wiling to accept personal responsibility for their life. They aren’t willing to accept pension reform. They aren’t willing to accept anything, it seems. So it looks at this point that we will be right back in this same boat in a few years once Greece runs up a new crop of debt that it can’t service.

  9. Interesting EM,
    A suggestion which would start a quick turn around but is unlikely to happened.
    David Cameron in UK decides to abandon “Clean Energy” , does a Steven Harper and sacks all the climate departments and hand-outs to green & climate organisations. Money would follow into UK strengthening the pound. A number of EU countries eg Czech Rep, & Finland would follow quickly. The Germans would revolt at having to prop up countries like Greece and let them fall over. Republicans in US would promise to do the same as UK and be elected by a big majority in both houses (maybe it is necessary to wait for that next year)

  10. Jason Calley says:

    @ E.M. ‘So just where will all the wealth creation come from? Where will the money flow arise to keep the USA clicking along and let Euro-Socialism continue to live the high life? Globally we have too much tax-and-spend and not enough ‘wealth creation and investment’. What there is, is way too messed up in the distribution. Wealth creation in China (feeding a few mega-rich) with consumption in Europe and the USA; but no method for the money spent to return to circulation in sufficient quantities. Eventually the money flows plug up and things grind down… Basically, the China Story has been more about wealth TRANSFER from Europe and the USA to China than it has been about wealth CREATION. So with the emphasis ever more on consumption in the USA, Europe, and the Neo-Socialisms around the world, there has been the inevitable imbalance of consumption demanded (just about everywhere) vs the wealth being horded in China. That story was fine as long as we had the fantasy that China would become a market for USA and Europe; not so fine in the face of Chinese Mercantilism and failure to recycle dollars and euros. When China has stopped being a dream of giant markets, what will be left?”
    I think you have hit the nail on the head. Put simply, we (the US and Europe) have increasingly distanced ourselves from the creation of wealth and become instead creators of money. The creation of massive amounts of unbacked money has distorted the pricing function of the market to such an extent that we are now suffering something similar to the fatal market misallocations that drove the USSR out of existence. The question is “why?” Why have we done this to ourselves? And equally, why has China and much of the rest of Asia continued to accept rapidly devaluing pieces of paper with I.O.U. on them in exchange for actual wealth? Are our leaders stupid? Are the Chinese leaders stupid?

    In my opinion, the answers are not mysterious. Are the European and US leaders stupid? No, not at all. In fact, they are doing quite well, and are amassing huge amounts of power and wealth for themselves. Bill Clinton, Al Gore, George Bush, Obama – none of them is likely to miss a meal. You may lose your job, your home, your family, but they will do quite well. And China? I think they know exactly what they are doing; when conversing with friends this last decade or so, I refer to their economic strategy as “fifth generation warfare.” We know about “fourth generation warfare”, roughly equated with guerilla warfare. Fifth generation is economic in nature and is actually a modern day offspring of the 19th Century Opium Wars between China and England. Just like Great Britain marketed vast quantities of Opium to addict and destabilize China, China is doing the same to us. The difference is that instead of opium and hash, they have sold us VCRs and televisions. They – the Chinese people – have worked their butts off creating wealth, and have used that wealth to destroy our manufacturing base. We have consumed so much almost free wealth that we have put our nation into hock and fallen into an opium dream that says we can become wealthy by selling imaginary financial instruments back and forth. Do I blame the Chinese? No – they are winning fair and square. Actually, I do not think the Chinese even came up with the plan. I think that the original plan was made by the European and US bankers back in the 1970s and was hand delivered to Mao by Nixon. I do blame the policies of the US government which have not only allowed, but actually encouraged the offshoring of American jobs for so many decades. I do blame the people who took an oath to the US Constitution and have failed in their duties.

    What will happen? Eventually the US will be so weakened, and the Chinese so strengthened that the Chinese will stop accepting IOUs for real wealth. At that point, the US will begin sending great quantities of raw materials to China and the US government will put up rights to minerals, logging and patents as collateral for Treasury Bonds sales. Actually, I assume that the government has already put up such collateral, but is simply not publicizing it. There will be massive sell offs of “surplus” governmental land, buildings and such things as roads and water rights. These actions are nothing new. We have seen this pattern over and over in the Third World. The IMF would support criminals and thieves in office as a tool to place already poor nations into further debt. The only difference is that this time it is not some Third World African country being sucked dry and stripped, it is the USA, it is the nations of Europe. Same pattern, same people doing it, just the victim is different.

    Is there a way out? Sure. Removal of sitting politicians by whatever means needed. Nationally, invoke the doctrine of Odious Debt. Repudiation of State debt. Shutting down the Federal Reserve. Withdrawing from any number of treaties (including NAFTA, which, by the way, was never legally passed.) Shutting down overseas military bases. Ending of federal assistance programs. Cutting national government to perhaps one fifth its current size. Pointing out that we have the world’s largest nuclear arsenal, and we will mind our own business, but don’t screw with us. Massive cutting of regulation and legislation, but rigorous enforcement of laws against fraud and enforcement of laws requiring that companies and individuals be responsible for damages they inflict.

    In short, smaller government and free market capitalism. Even shorter, freedom and natural rights.

    Realistically, I do not expect to see the people of the US move to solve our economic problem. It will be easier to kick the can down the road just a little farther until there is no road left. THEN people might get interested in fixing things, but probably not sooner.

  11. Jason Calley says:

    Speaking of the dichotomy between modern China and modern USA, I just saw this comment at Lew Rockwell:
    http://www.lewrockwell.com/blog/lewrw/archives/97701.html
    Begin quote:

    Writes Skip Cook:

    “Ni Hao from Guilin, China,

    “I have been here for two weeks and there are many impressions I have—too many for this email. But a couple I think are worth a mention:

    “Anarchocapitalism is alive and well here. My Chinese host has two friends who in the past week have started businesses; strangely enough, both were hotels. There seems to be almost no government permission required. What permission came in approximately 3 days and cost roughly $50 US. Guilin has a policy of open government: “Please come to our city, open any business you like, and join our community”—no subsidies offered or expected. Just pony up the money, pay your dues, and risk what you wish; be prepared to succeed or fail. Pure competition is flourishing here.

    “Secondly, I have noticed roadside vegetable gardens both here and in Shanghai. I was curious how in the vein of the friends of the Little Red Hen, passersby were prevented from harvesting what they did not cultivate. The answer: That is exactly why they are grown. Self improvement (spiritual) for the grower and anyone who is hungry can take what they need. The best thing of all: No bureaucrats required.

    “Peace from the land of 1.4 billion people.”

    End quote.

    Is Mr. Cook right? Not having been to China myself, I cannot speak from personal experience. On the other hand, I have two neighbors, both Attorneys, who travel to China almost every year for the last seven or eight years. They have told me very similar stories to what Mr. Cook reports.

  12. TIM CLARK says:

    My prediction is the euphoria over the European debt solution du jour will last about two weeks.

  13. P.G. Sharrow says:

    I too have a very large garden that helps feed the neighbors. A benefit to both body and soul.

    China’s free ride from the 17th century to the 20th is near over as they can’t buy the leap into the 21st century until the Americans create it, and they have now proved to most that they will not allow real access to their markets. GE, Microsoft, Boeing and others have transfered their intellectual property to China to gain access to the ” Giant Market” and now China will eat their lunch and dinner around the world with cut rate prices for the same products.” Made in China” by Chinese companies.

    Today everything looks shiny and new and modern, it is, the best money can buy. But now cracks are appearing in the grand design. Chinese bureaucrats are the best in the world at stagnating a vibrant economy. I have faith that 3,000 years of history will prove true again. pg

  14. adolfogiurfa says:

    @BTW: What would it happen if the FED increases interest rates; perhaps that would arrange things, as to compensate real inflation and promote saving? 0% it´s a bit weird,,,,

  15. George says:

    The federal reserve generally increases rates for a couple of reasons:

    1. To protect the dollar.
    2. To curb inflation.

    There is currently little risk of #2 but when it does come, it will come with a vengeance. Once inflation takes all those underwater mortgages above water, banks will have a huge amount of money that is currently sitting in vaults as reserves against those mortgages available for them to dump into lending. The Fed will not likely be able to get that cash back out of the economy as fast as it put it in. Inflation might go exponential once the mortgages come above water.

    #1 might be a worry at this point.

  16. Pascvaks says:

    “The Peter Principle” is alive and well in the West, indeed, there is no other principle in play these days. Ineptitude has triumphed over mediocrity, and the greatest, most complex, and intricate puzzle palaces ever constructed by the minds and hands of human beings are crumbling like the great Twin Towers. Nothing is impossible, we only think it can’t happen. Beware of little men with grand ideas who promise to fix it all for the price of a little blind ‘faith’, a socialist agenda, and the surrender of your immortal soul in the hereafter. There is nothing new under the sun; when chaos reigns, war rules, and rockets red glare.

    Can we fix it? Yes, but I’m not hopeful. We have grown too fat and lazy, and our minds have slowed.

  17. E.M.Smith says:

    @George:

    Nice article. Sums it up nicely too. So the German Credit Card is full (voters demanding to vote on any more…) and the EFSF has decided to ‘lever up’ to avoid more voter involvement… Private lenders are demanding very high rates (and may bail all together if the risk goes too high) while The European (piggy) Banks have been force fed bonds they don’t want, that have eroded their capital, and that after the ‘haircut’ will require bank ‘recapitalization’ (that would not be needed if the banks were free to be capitalists and NOT lend to the PIIGS).

    So the inevitable “socialization” of the PIIGS consumption is reaching an end. The debt has been spread to about as many new pockets as possible (even to the general Euro Zone tax payer via ‘recapitalizing’ of banks that have been raided (very indirectly, but nicely done).

    Unless they can get some Chinese or Saudi money in, or fool the rest of the world via an IMF dodge into handing over some cash, the “Euro-Fix” is going to wear off about as fast as a heroin fix and we’ll be right back at the borrowing needle again in a month or two.

    One of THE major reasons why it’s a bad idea to put governments in charge of handing out “goodies” like health care, public transportation, and pensions to the population. Makes it way too easy for politicians to hand out large amounts of IOUs, due after they are gone, and un-payable in any long term. AND they are completely unable to face the inevitable social revolt when the lies promised become solvable only by revocation; so they go for ever more ‘whoppers’ and ever more pockets spread more widely to pay the freight that can not be paid. Happens every time…

  18. E.M.Smith says:

    Well, on the daily chart we’re returning to the SMA stack from the topside, about to kiss it. IFF that holds, we’ve got a confirmed new run entry point.

    Unfortunately, we’ve got dueling crossovers, with the ‘weekly’ chart finally getting into the positive crossover regime while the daily chart is just about to exit a ‘counter trend rally’ run up. What time scale to believe?

    IMHO, this is the kind of stuff you get when you are in sloppy ‘news driven markets’. We’ve got ‘correlation’ running at very high levels (something like 85% of stock motion is the index) with just about no-body moving against the tides. That happens when some major exogenous events are driving markets. Things like, oh, systemic bank failures and the Euro Zone Song And Dance.

    So while I’d like to say something useful about this market, the best I can offer right now is to just say no. It’s a mess. It’s going to stay a mess until Greece is sorted out. Greece is NOT going to be sorted any time soon. Why buy a mess?

    Maybe some selected other countries could be buyable, but as most countries have very high correlation with the US / Europe, I’m just not seeing it. Maybe some deep value resources are a buy (natural gas and copper come to mind) but if the economy is a mess, how much will THEY be doing OK? Oil has been on a run up, but it is fickle and volatile, and if demand isn’t there from all sorts of Bad Things economically, what about price then?

    So, with all that said, I’m still sitting out waiting for inspiration. And not getting it. When markets move up and down 4% in a day, buying for a 10% hoped for gain over a year or two is more a game of “hope I picked the right day” than anything else. The involuntary day trader…

    Maybe I’ll feel better about things tomorrow ;-)

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