Navigating With Charts

MarketCycle Wealth Management

[Charts shown as of Saturday, April 28, 2018.]

May 16, 2018 UPDATE:  Since publishing the below blog on May 1, 2018, all of our predictions in this blog have come to fruition.  Stocks broke out of their consolidation triangle to the bullish upside, inflation increased, the oil price headed higher, the US Dollar moved higher and Treasury-bonds broke down below their support line (we sold our Treasury-bond position on Monday May 14th, one day before Tuesday’s big bond market drop).  I now believe that the US Dollar will start to gyrate sideways and that GOLD may eventually break out to the upside to join the oil advance, and for Emerging Market stocks to strengthen further.


A chart is simply a bunch of information put into visual form.  Certain charting techniques can help us to navigate the investment world.  We’re mostly looking at data from the United States because its economic size dwarfs other economies… even China is just considered an emerging market.  Remember the old Wall Street saying:  “When the U.S. sneezes, the rest of the world catches a cold.”

STOCKS:  As I wrote during 2017, the market had not experienced a normal 5% pullback in almost two years and we were long overdue one.  In addition, the market was experiencing the exact same symptoms that had occurred prior to the Crash of 1987, also known as “Black Monday.”  The past few months have not been fun for investors, but I personally feel a sense of relief that the excess pressure in the market has been released without worse damage.  We are off of the January highs, but we are also still in relatively good shape and apparently heading higher.

Stocks have now gotten their 5%+ pullback and the built-up pressure is released:


And important market internals (such as the Advance/Decline Price & Volume Lines) as well as corporate earnings continue to move higher, showing continued stock market strength despite investor’s unrelenting fears:


On a short term basis, stocks have entered a multi-month sideways triangle consolidation and this suggests eventual higher prices, once resolved, since this is a continuation pattern.  There are multiple lower support lines (the red & blue dashed lines) and stocks will likely move above the green dashed line… and then higher:


Shown below is the S&P-500 since the 2016 start to the late-stage of the market cycle.  We remain within the confines of our intermediate-term trend channel despite piercing both above (the melt-up euphoria that I wrote about) and then briefly poking out below the channel:


This next chart shows a long-term view of the S&P-500.  The current bull market is a long one, nine years so far.  It has been extra long simply because the prior economic-recession had been extra bad.  We remain within the confines of our long-term trend channel and I believe that the market wants to continue up toward #5 on this chart, baring any extreme political or Federal Reserve stupidity.  The recent consolidation triangle (shown in the chart two above) looks much smaller on this chart:


BONDS: Investors have been worried about rising bond yields, and for good reason.

We have been in a 30 year bull market for bonds and bond yields have now poked their head above this all important trend channel for the 10-year Treasury-bond YIELD (see the red circle).  Breaking this trend channel is a big deal; the result will likely be a decade of slowly falling bond prices and slowly rising interest rates.  Since so many investors protect their stock positions by owning bond positions, this changes the game and kills the “Buy & Hold” stock/bond mentality.  Bond yields up = bond prices down.  We now have to be smart and selective.  Importantly, bond yields had already formed their base (horizontal red-dashed line, during 2012 to 2016):


IEF, the popular 10 year Treasury-bond ETF (showing price rather than yield) looks like it wants to break the final neckline of a Head-and-Shoulders formation and then move down toward the red-dashed line on this chart.  This looks bad but it only represents an additional 10% loss from here:


The U.S. Dollar is holding above the prior 35 year overhead resistance line that it pierced in 2015 (which is now acting as a sort of support):


INFLATION is, once again, zig-zagging higher.  This is a late-stage phenomenom:


Inflation normally drives commodity (especially energy and gold) and Emerging Market prices higher:


SUMMARY:  IMO, we are in the second half of the late-stage of the current market cycle that began in the Spring of 2009.  So, as I keep saying, we are still in a stock bull market.  Inflation normally rises during this late-stage part of the market cycle and commodities and Emerging Markets do well, as do large-cap cyclical growth stocks of U.S. and Developed Markets (although non-USA Developed Markets are beginning to show signs of weakness).  The U.S. remains strong.  Emerging Markets currently represent under-valued potential in a world of otherwise correctly priced assets.  U.S. and calculated global recession chances 2 months out are less than 1%, which means “no recession.”  In fact, the next recession is likely over a year away and investors will not want to miss out on any potential final bullish melt-up in stocks, possibly led by innovative technology and Emerging Markets and industrial commodities.  They will want to miss out on the next economic recession, which may crush stocks by somewhere around 33%-ish.

Right now, IMO, we are in a normal and important and needed correction within the confines of an ongoing bull market in stocks (and energy & industrial metals, and soon gold) and worry remains fruitless.

From my perspective, the end is in sight, but not near.



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MarketCycle Wealth Management | Stephen Aust
MarketCycle Wealth Management, LLC is a Registered Investment Advisor. Information presented is for educational purposes only, is not considered an individualized recommendation or personalized investment advice, may not be suitable for everyone and does not intend to make an offer or solicitation for the sale or purchase of any securities. All investments involve risk and unless otherwise stated, are not guaranteed. Past performance or performance charts are not a guarantee of future performance. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Be sure to consult with a tax professional before implementing any investment strategy.