Technical Analysis Roundup: Stock Market, Treasuries, & Trends ~ market folly

Tuesday, January 26, 2010

Technical Analysis Roundup: Stock Market, Treasuries, & Trends

We haven't done a technical analysis roundup in some time so we decided to post up some charts on various topics. Included in this post is:

- A look at the Dow Jones
- A possible trade in long-term treasuries
- Historical comparisons between 1930 and the current market
- And a look at a multi-decade stock market trendline

Since a lot of people seem to be worried that the primary trend in the markets has recently been violated, Adam decided to create another technical analysis video on the Dow Jones Industrial Average (DJIA). Regarding this video, he writes, "For some time now we've been very concerned that all the major indexes are in the 'thin air' and have exceeded some key Fibonacci retracement levels. This new short video explores that and looks at a key Japanese candlestick formation that could really make a difference and be the first clue in the demise of the Dow. I'll also show and share with you a specific number to look for in February. Should this level be broken, then it will signal a major reversal to the downside for the Dow."

Below he outlines some of the retracement levels that could act as support if the market starts to break down:

He outlines two key levels to watch in the Dow Jones Industrial Average. Firstly, he notes that if the market closes below 9,678 then look out below. Secondly, based off of Fibonacci retracements, he identifies a downside target level of 9,712. Adam and MarketClub are currently out of the market as they let the prices dictate the action and wait for a better signal. They are definitely very cautious here. Watch his video for further technical analysis insight.

Secondly, we wanted to highlight something that we've noticed recently regarding technical action in long-term treasuries. Just yesterday we posted up Oaktree Capital and Howard Marks' plays for inflation and shorting long-term bonds was one of his suggestions. Not to mention, we've covered numerous hedge funds that have been in curve steepening plays as they bet on higher interest rates. Now, it could very well be a longtime before we truly see signs of inflation. However, there seems to be a trading opportunity at hand. See our annotated chart below for the play:

(click to enlarge)

Basically, long-term treasuries have rallied right up to the 50-day moving average and a previous support level. Both of these are now resistance and the short-term trend is downward. Additionally, the iShares 20+ Year Treasury exchange traded fund TLT seems overbought, you could have a low-risk setup with clearly defined exit points.

Lastly, we also wanted to post up some charts from Steve Puri. He highlights some historical trends to put the giant stock market rally of 2009 into perspective. Given that the market has sold-off hard as of late, Steve points out a chart that could really scare you by comparing the current stock market to that of 1929-1930, where after a large rally the bear market returned and another leg down began:

(click to enlarge)

Potentially scary stuff there as bear markets are known for their vicious rallies and declines. Are we heading down further? We'll have to wait and see, but it never hurts to be cautious. We also wanted to highlight another chart Steve posted up regarding long-term trendlines. The chart he posts illustrates that in 2009 we broke a long-term trendline, but the market has subsequently rallied right back up to it. He suggests to go short as this will serve as resistance and to exit the short on a monthly close above that trendline he's drawn:

(click to enlarge)

Through all of the above, keep in mind that technical analysis is in the eye of the beholder. You can almost always annotate charts in a way that supports your case. That said, it is definitely one of the many useful tools in the investment toolbox. Note that this isn't meant to be some doomsday post. We just wanted to share these charts because they do make you stop and think.

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