Stock markets around the world have been reaching up to new highs recently, but as they continue to reach upwards I am beginning to see some cracks appear, and I suspect that we are going to witness some weakness in these markets in the weeks ahead. In this post I would like to highlight the worrying cracks that are starting to develop.
To receive these blogs “instantly” Join/Like/Follow Us. If you don’t do social media – Click to Join Feedburner to receive these blogs by email.
We announced yesterday that we are launching our new Hurst Signals service next week, and in honor of that grand occasion I am going to use charts from Hurst Signals to illustrate my points. Hurst Signals are the result of many months of hard work. It is very exciting to be able to deliver quality Hurst analysis, and the resultant trading opportunities to a wider audience. If you haven’t yet seen the video which introduces Hurst Signals to the world then make sure you take a look and add your name to the list so that you are informed of all the details.
In all of these charts the purple line is the 20-day FLD (future line of demarcation). The letters A – H represent the reliable sequence of interactions that occur between price and the FLD within an 80-day cycle.
The signs of impending weakness are seen in individual markets, and also in a comparison of markets from around the world. Let’s start with a look at the S&P 500:
The next trading opportunity here is a short trade, but that is not what I mean by a sign of weakness. These are the signs of weakness here:
- The A-category interaction occurred at a price of 1800, and created a target for the upwards move of 1846. The high of 31 December 2013 reached up to 1843, which means the target wasn’t quite reached. Usually A-category interactions exceed their targets, and so it would appear that bullish momentum is waning
- At the B-category interaction between price and the FLD, price crossed down below the FLD. Usually price finds support at the FLD at this interaction, and crossing below it indicates increasing selling pressure.
- Finally the C-category interaction has (so far) resulted in a very lackluster move up, indicating a definite turn down in the pressure of the longer cycles that have been driving the market up so strongly. Of course the market might still surge upwards and provide us with a better move, but it is worrying that it is struggling so hard. Also interesting to note that the target of the A-category was very nearly achieved at Wednesday’s high of 1845.25.
Now let’s compare this to the Dow Jones Industrial Average:
The picture here is similar but subtly different.
- Unlike the S&P 500 the target of the A-category interaction was fulfilled and exceeded. This might be a sign of strength, but it looks very much like a “last gasp” show of strength, when we look at what happened after that.
- The B-category interaction looks stronger than the S&P 500 as well with price finding support at the FLD, but that is where all the strength in the DJIA collapsed.
- The C-category interaction failed to even break above the FLD in a dismal display of growing weakness. One could argue that the C interaction is only occurring now, but I would favor the classification shown above which has the D-category interaction on Monday’s strong move down.
- If that D-category interaction is correctly identified then we would expect an E-category cross above the FLD next. The way in which the FLD has provided resistance over the past two days is yet another sign of weakness.
What about the Nasdaq, which has been so much stronger recently?
Indeed the Nasdaq does look a bit stronger, but it is an interesting mix of the Dow and the S&P which doesn’t leave me feeling much more optimistic.
- The A-category interaction managed to (only just) achieve its target of 3586 before a disastrously bearish B-category interaction during which price dropped well below the supporting hold of the FLD
- The C-category interaction experienced the formation of a lower trough (on Monday) while price was tracking along the FLD, a very worrying sign.
- When price did break free of the FLD it looked as if though perhaps some strength was returning to the move, but the base of that move looks very weak to me, and I wouldn’t be surprised if it is a short-lived burst upwards.
Hurst Signals also cover four European stock indices, the FTSE-100, CAC-40, DAX and EURO-50. I find European indices provide an interesting counterpoint to the US indices, and so let’s take a look at one of them, the FTSE-100:
Now this chart looks much better! There are none of the signs of weakness that I have been pointing out in the US markets. Note how the A-interaction exceeded its target, price tracked along the FLD beautifully between the B and C interactions, and the C-interaction has resulted in a good strong move upwards. Of course the next interaction is a cross below the FLD, and so we do expect this market to move down soon, but we aren’t seeing those same signs of weakness. Perhaps the European markets are going to lead the way higher over the next while?
I hate to spoil the optimism one feels looking at that chart, but it is a good idea to step back and view the chart in a slightly wider context. Here is a look at the past three months or so in the FTSE:
Oh dear. The recent price action looks good, but set in this context we can several other signs of weakness:
- The previous 80-day cycle had a very mixed shape, tending more towards bearish.
- The move up since mid-December looks good on its own, but we see now that all it has achieved is to bring price up to the levels of late October last year. Price might push higher of course, but the chances of a fairly large double peak are increasing.
For the sake of comparison here is the same time period in the DJIA:
This looks much more bullish, with good bullish cycle shapes, but the cracks are beginning to appear in this bull move, which is why I suspect we are going to see increasing stock market weakness ahead.
Do please let me know what your thoughts are. Are you seeing signs of weakness, or do you think the bull is still growing in strength?
And if you aren’t getting our emails about Hurst Signals, make sure you add your name to the list. They will bring you regular trading opportunities without the need to install any software or access data for the markets you trade. And if you already have the best Hurst software around, we are offering a great discount on Hurst Signals to Sentient Trader users.
I wish you profitable trading.