28 January 2010. Juan Abdel Nasser, EconomyWatch.com. Just over 3 months ago, on the 26th October 2009, I said that stock markets were experiencing a sucker's rally. I predicted that a new bear market would set in during the first quarter of 2010. I was mocked in some quarters, as skeptics usually are during bullish times, but sadly I have been proven right.
Most economists - at least not those blinded by either dogma or an over-reliance on quarterly data - who made a fundamental analysis of the state of western economies, could not help but feel that the sense of escape from calamity was a bit premature. If you looked at unemployment, housing, commercial property, business order books, lack of credit and abundance of debt, there was no doubt that we were still in deep trouble.
But truth be told, what gave me the courage to stick my neck out and make that bold prediction was the work of our favourite (and slightly mysterious) long-term technical analyst, Simon, who goes by the name Futures 618.
Simon likes to focus on signal and remove noise. He doesn't let on too much about which is which, but he has an excellent track record in predicting broad trends. And what he has to say now is as scary as it is important.
The rising wedge pattern that indicated a sucker's rally for the DOW (Dow Jones Industrial Average of the top 30 companies in the US, or the DJIA), has been confirmed. Look at the chart above and you will see that there has been a strong move downwards at the end of last week, followed by a sideways movement in the last few days.
This break down through the lower limit of the rising wedge pattern has been confirmed across virtually every technical indicator - take a look at the DJIA at StockCharts.com to see what I mean. The index fell through the 50-Day Moving Average (50DMA) - and stayed there. Trading volumes were above recent averages. Various flavours of RSI and MACD all turned sharply negative.
In fact the move was so bearish in tone that Simon has revised his forecast downwards. He says
Equity markets have turned more bearish this week and unfortunately the March 2009 lows will not hold.
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