Charts Hinting At Direction Of Next Breakout

Probabilities Rather Than Forecasting

Long-time followers of CCM know we are not fans of market forecasting, which drags the human desire “to be right” into an already complex investment equation. However, we are big fans of assessing bullish probabilities relative to bearish probabilities based on the hard evidence we have in hand.

What Is The Data In Hand Telling Us?

As shown in the chart below, the broad NYSE Composite Stock Index recently broke above resistance that had been in play for ten months (see red arrows). Is the bigger picture currently favoring a failed breakout or resumption of the current bullish trend?

Longer-Term View Holding Breakout

When markets are saying the same thing via multiple time frames, it increases technical confidence. The NYSE Composite also recently broke above levels dating back to October 2007. The green arrows below show successful retests of recent bullish breakouts. Regardless of what happens in the intermediate-term, as long as the NYSE Composite can hold above 10301, we still have a successful and bullish long-term breakout for stocks. A move below 10301 would increase concerns. Monday’s close was 11173.

Is Fear Gaining Traction?

The chart below shows the performance of emerging market stocks (EEM) relative to defensive-oriented Treasury bonds (IEF) during the “max fear” phase of the 2008 financial crisis. The downward slope of the EEM:IEF ratio is what fear looks like.

How does the same chart look today? Answer: much better. The conviction to own emerging market stocks has been higher than the conviction to own defensive bonds in recent months, which looks more like confidence than fear.

Is Systemic Fear Increasing?

When investors were concerned about the stability of the global financial system in 2008, global stocks (ACWI) significantly underperformed gold (GLD). The chart below has a fearful look.

Rather than lagging gold, global stocks have been significantly outperforming gold in 2015. The chart below is not raising yellow flags.

1 2
View single page >> |

Disclosure: This post contains the current opinions of the author but not necessarily those of Ciovacco Capital Management. The opinions are subject to change ...

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.