Banks

It is "lights out" for Financials.

Below is a daily chart of a capitalisation weighted index of JP Morgan, Bank of America, Wells Fargo, Citigroup and US Bancorp - the largest banks in the USA. As is clear, a very bearish pattern has been activated. I am not sure how long the joke of broader indices at or near the highs will last, but either banks rally hard, or indices come down.

Suspended in Disbelief

This is all getting rather boring. US large-caps are just about the only markets that are pushing towards new highs. EU markets are not, where stronger indices remain about 2% below October highs (DAX) while weaker ones are over 7% below those levels (Italy's MIB). Neither are Asian nor other Anglo-Saxon (Canada & Australia). Overall, I think October highs should provide cast iron ceilings for equities, and they will roll over soon.

This is a daily chart of the German MDAX (German mid-caps, excluding technology, that didn't make it into the DAX 30). Since their October highs, the mid-caps underperformed Germany's blue-chips. The risk is clearly to the downside, with stops above December and November highs.

This is a four-hourly chart of Australia's ASX200 index. It would be particularly sensitive to a China-led recovery. This index made no progress since the October highs, and remains over 5% below those levels. In addition, it looks particularly bearish from a wave perspective.

This is another index that should be quite sensitive to appreciating commodities - Canada's. While stronger than Australia's, Canada's index remains an underperformer relative to the US.

Road Map to Disaster

Stocks world-wide are looking increasingly weak. Banks and other financials are particularly weak.

This is a daily chart of the European Banking Index - and it does not look pretty. Last Friday (US payrolls) highs should act as very strong resistance (those levels are about 4.5% higher right now), and this index ought to fall to its 200 day moving average, about 16% lower.

This is a weekly chart of one of the BRIC darlings - Brazilian Petrobras. With over $200bn market cap, this is one of the largest companies on the planet, and it, too, does not look good.

Shifting Gears

BOTTOM LINE: This week's price action in European stock indices suggests that they have topped for this cycle, and will continue lower after a brief (up to 48 hours) correction higher.

Below is an hourly chart of the German DAX. From the high last Friday (US Payrolls day), the DAX fell in a clear impulse. I believe that the high last Friday finished a corrective structure in play since the 3 November low. This means that a new impulse is unfolding, which should soon take out that November low (5316, or 6.7% lower). DAX is one of the stronger EU indices; Italy's MIB is much weaker, and is perhaps a better candidate for a short.

Crunch Time pt II

BOTTOM LINE: Financials have likely peaked for this cycle, and remain dangerously close to crucial supports. These supports will likely break, pulling down the broader indices.

Below is a daily market cap weighted index of JP Morgan, Bank of America and Wells Fargo. The neckline of the head and shoulders top that took four months to form is about 2% away. I think breach of neckline supports is very likely, and should that happen, there is little in the way of supports until July lows. Not pretty at all.

This is a daily chart of the KBW Banks Index. So far, it is moving exactly according to plan, and yesterday's Bank of America news highs should provide very strong resistance. In the event of a bounce, those highs should be used as stop loss levels. Should those highs give way, a more complex correction is likely unfolding. I do not consider an upside break likely. Targets for this index remain about 12% below current levels.

Home Run

BOTTOM LINE: Not long to wait now for risk and related assets to start falling. Equities will fall, USD, government bonds and volatility will rise.

This is an hourly chart of the KBW Banking Index (BKX), shown with this very count on Tuesday 1 December. I see Bank of America (BAC) up about 3% following their announcement that they will repay $45bn. This would be enough to take the BKX higher by about 2%, given BAC is the largest constituent at 9%... and it would then come to the perfect zone of between 44.50 and 45.50 where the whole correction from 3 November 2009 should end. This will likely mark the end of wave II or B, which in either case would result in a move lower of at least the same magnitude as the October sell-off, which was 12.5%.

Banks

BOTTOM LINE: Banks will not do well. On shorter term charts (below is an hourly chart of the BKX - KBW banking index), ideally, we see a move higher to challenge today's highs. This would complete the corrective structure from 3 November 2009 lows.

Crunch Time

BOTTOM LINE: Risk and related assets retraced between 50% and 76.4% of their post-Dubai declines. The retracements so far, look corrective. Currently, pivots lie about 1.7% either way of the market. That much lower, and the corrective nature of the most recent rally is confirmed. That much higher, and 2009 cycle highs are exposed. For a host of reasons, I think that we break to the downside.

Here is an hourly chart of the German DAX. The rally following a very neat "Dubai" impulse lower is clearly corrective so far.

For technical "geeks": I count the impulse from early November lows to have finished at what, for most indices, is a secondary, later, lower high on 25 November, not an earlier high of 18 November. Of the major global indices, only the DJI managed to break the 18 November high.

Below is an hourly chart of SP500 futures. The count in purple was made 3 weeks ago on 11 November, and the final purple "5" never materialised. I think the red "5" took its place, and is a failure in all but the Dow.

Roast Pork

BOTTOM LINE: Collectively, Portugal, Italy, Ireland, Greece and Spain are 1.3% above important, multi-month long head and shoulders neckline support. Italy is already through that support. Medium and long-term tops are very close for most asset markets.

Below is a weighted daily chart of stock indices of Portugal, Italy, Ireland, Greece and Spain. This is a very, very bearish picture, and it will likely resolve to the downside fairly soon.

Divergences

BOTTOM LINE: Some indices took out their November highs (DJI), some are hovering around those levels, and some have retraced about 62% of last week's drop (expected), and some couldn't even manage that (Italy). On the one hand, this week is very positive, from a seasonality point of view. On the other, patterns on medium- and short-term charts appear bearish. This warrants a cautious bearish stance.

This is an hourly chart of the SP500, with projections as they were made about two weeks ago. The Monday rally to challenge November highs appears to have taken an impulsive shape, which suggests that it could be a failed fifth wave higher, as originally projected. In any case, upside is severely limited. Downside remains large.

This is a daily chart of the Italian index, and it is very weak. So far, the corrective rally retraced less than 50% of the decline last week, and thus this index is a prime candidate for a short.

PIIGS!

BOTTOM LINE: Western equity markets sold off in what appear to be impulsive waves from their November highs, suggesting that yet another top might be in. This has bearish short and medium term implications, while allowing for a brief (48 hours?) correction higher of about 2%. These corrections, if they materialise, should be sold into.

Below is a daily chart of the Italian stock market index. For a lot of reasons, I believe that it is unlikely to see 2009 year highs for a long, long time. The index is trading below the ascending trendline, in blue; it has been unable to hold above the 55 day moving average; the length of its "C" leg (from red "B" to red "C") is related to the length of the "A" leg (from red "V" to red "A").

I will use any bounce, if it happens, to increase short exposure to this index.

This is one of my favourite synthetic indices. It is a market cap weighted index of Portuguese, Italian, Irish, Greek and Spanish indices (abbreviating to "PIIGS"!). The analysis here is the same as for the Italian index, except here the patterns are even better. PIIGS account for 25% of EU GDP, and their stock market indices are going down hard.

Really Vulnerable

BOTTOM LINE: Evidence is mounting that asset markets are getting ready for some serious corrections in favour of the USD and against everything else!

EuroSTOXX50, on an hourly chart below, could still mount a ~3% rally that I believe would be final for this cycle. However, I must stress that the structure from November lows is now complete, and could very easily fall apart here.

Same applies to the SP500, shown here on an hourly chart. While a new high for 2009 would be most welcome, it doesn't have to materialise - stocks could fall from here, and patterns would still look great. Any strength into 1120 should be sold into, in my opinion.

Vulnerable

BOTTOM LINE: Risk is vulnerable on the downside.

SP500, on an hourly chart below, has followed projections well. The last leg higher is a little short, and might therefore extend for a bit, however, the risk is now very much on the [extended] downside.

DAX failure?

BOTTOM LINE: There are signs of a top in European (and specifically EURO area) equity indices.

Below is an hourly chart of the German DAX. I think chances are high that an impulse that began at the November 5316 low is very close to completion. This should result in, at the very least, a correction to that impulse, which could take us about 4-5% lower from current levels. I believe, however, that we are setting up an intermediate term top.

BOTTOM LINE: So far, equities are moving along the lines established last Wednesday. If these patterns are to play out, I expect a volatile week (it is OPEX!), as waves 4 and 5 complete. There is a chance that for European indices, waves 4 and 5 have finished.

This is an hourly chart of SP500 e-mini futures. The structure is maturing, and will soon be ready to reverse down.

Short and Caught?

BOTTOM LINE: Well, what do you know, the broader US market is at new highs for 2009. It is led by blue chips and large caps. It is held back by European indices, small and medium caps, financials and other "canary" sectors. I honestly cannot be buying here, but it is likely that we advance a few percent further, and therefore have to prepare for that.

Below is an hourly chart of SP500 e-mini futures, and I offer a bullish count. While I expect some consolidation around previous highs, it is highly likely that we see 1120 or so tested soon.

Crude Oil (on a daily chart below) will now finally get a chance to make that much needed new high above $82 (with a scope to extend as far as $86). Since peaking at $82 on 21 October, it has traced out a triangle pattern, which should resolve to the upside. I expect Oil and risk to peak together, sometime next week.

Correction higher (now even) close(er) to completion

BOTTOM LINE: Corrections higher in risk and related assets are likely very close to completion. While major US indices advanced about 1.5% higher than expected, EU indices, notably EURO area indices are moving along the expected lines. Internal structures of these indices suggest that the next leg of the decline is imminent.

Below is an hourly chart of the Italian MIB index (Italy is seventh largest country, in GDP terms - one below the UK). The MIB has been much weaker than most EURO area indices, and currently retraced just about 50% of its 11.3% decline. The internal structure of the decline and subsequent rally appears to conform very well to wave guidelines, with the correction finishing (?) with a clear impulse higher (15 minute chart below the hourly chart).

This is a very short-term, 15 minute chart of the Italian MIB.

Correction higher close to completion

BOTTOM LINE: The expected correction higher is in its final stages. Risk and related assets should turn lower today/tomorrow.

Below is a daily chart of the German DAX. The expected correction materialised, and is very likely close to completion. I now expect weakness that should at least test the Friday 30 October low. It is also highly likely that that low will be breached and we head much lower.

Fireworks

BOTTOM LINE: The minimum conditions for a correction higher in "risk" and related assets have been met. It is now highly likely that we will see substantial moves to the downside.

Below is a four hourly chart of the SP500 (futures, including GLOBEX sessions). I believe that equity markets across G10 will sell-off. It is possible that we have only just finished building the first part of a longer (in time) correction higher in risk. Under this scenario, we will see volatile, overlapping price action for a few days, followed by a final attempt at the 1060-1070 level, possibly into the end of next week. However, looking across other markets, notably FX, where the USD is set to strengthen substantially, I believe that the impending sell-off will easily take out last Friday lows, and rapidly continue lower.

Right Shoulder pt IV

BOTTOM LINE: Expected corrective strength in "risk" and related assets and corrective weakness in USD materialised. I expect these to continue into early next week, as the "right shoulder" is market on the charts. This will set up the plateau for some serious weakness into end of November and December.

Below is a daily chart of the German DAX. This index, along with most G10 equity indices, will probably correct higher for the next few days. Given the nature of the decline from the October 20 top, it is very likely that another sell-off is ahead of us, which should be at least as big in terms of price as the first one. Longer-term, it is likely that the bull market of 2009 is over, and prices will work their way towards and beyond March 2009 low.

This is a daily chart of EUR/USD. It is likely that EUR topped against USD, and will trade substantially lower into December.

This is a daily chart of Crude Oil. As I repeatedly said, I expect at least a marginal high above $82, possibly extending to $85. This will likely happen soon, and set up a plateau from which crude should decline back to at least $65. In all likelihood, this will add as additional pressure on equities, and will coincide with a strengthening USD.

Right Shoulder pt III

BOTTOM LINE: The market was very weak on Friday, unexpectedly so. This reinforces the case for a substantial shorter-term rally to ease off the oversold condition. This rally could last most of this week, and possibly into mid-next week. Action last week substantially increased the odds that a medium-term top is in. There is now a possibility that a long-term top is in as well. Should the markets rally along expected lines, a very neat "right shoulder" would be built - likely to be recognised by a greater number of market participants.

The German DAX, shown on the daily chart below, will likely rally for some time. I cannot see this rally exceed 5700, and expect it to end between 5600-5700. Similarly for the SP500, I expect the topping range to be between 1055 and 1070.

A rally in risk and related assets will likely coincide with about a 10% rally in crude oil. If oil were to top around current levels, without making at least a new high above $82 (2009 high), it would look unfinished and "strange" on the charts... much like I thought stock markets would look had they topped in late September.

Cycles in ISM PMI

I would like to share some ideas that I have been following for a while and lately modelled developed myself on the cyclical nature of oscillations in the Purchasing Managers' Index, measured and published by the Institute of Supply Management in the US. While this will be the main point of the post, I will briefly give some background to the study of cycles in Economic activity.

It is of course known that the business cycle influences just about everything in the economy. Mainstream economics primarily focuses on inventory cycles and frequently accompanying cycles in monetary policy. These usually last no longer than 3-5 years. However, mainstream economics tends to ignore fairly apparent cycles that span decades. Brian Berry described and analysed roughly 30 year cycles in US economic activity, centred around infrastructure investments and capital stock replacement. For more information, please refer to his brilliant book (Long-wave Rhythms in Economic Development and Political Behaviour, 1991). In the future, I will aim to write up a brief introduction into his work and illustrate with examples by analysing roughly 30 year cycles in US Industrial Production (IP). For now, I will just say that there is some evidence that a 30 year Berry cycle finished with a collapse in US IP into June 2009. A new 30 year Berry cycle has thus likely begun, and will be most similar (again, for reasons which I will aim to elucidate in the future) to the 1921-1946 cycle. Note that the cycle that has just begun will be most similar to the one that spanned the Great Depression and the second World War. If this analysis is correct (and it was very useful to predict both the downswing in 2000, upswing in 2003 and the most recent collapse), then we can expect an early peak in US IP, likely around 2012, followed by bleak "teens".

Now on to the ISM PMI.

First, the charts. As mentioned above, I see US economic activity unfolding in cycles roughly 30 years in length. The most recent cycles are 1980-2009 and 1946-1980. These cycles are clearly evident in US IP data and in ISM figures (chart 1)

Chart 1: ISM PMI 1946-present

The chart presents two complete time series: ISM PMI levels from 1946 to 1980 in red and 1980 to 2008/9 in blue. Major peaks and troughs are clearly aligned. The last drop in the blue line came earlier than expected, but was well telegraphed by IP charts and other indicators. What is important now is that the very sharp rise in the index since December 2008 (shown in green on the far left of the chart - the third and incomplete time series) probably signals the start of the new cycle.

Interestingly, the cycles above can each be divided into three roughly equal (in time) parts, of about 10 years each. It makes most sense to compare like with like, so I will compare the 10 year cycles that began their respective 30 year cycles. However, comparing 10 year cycles that are in the middle of the longer cycle with each other or even with other 10 year cycles (placed elsewhere in the longer cycle) yields similar results - major peaks and troughs overlap.

Chart 2: ISM PMI (selected) 10 year cycles

Chart 2 shows three complete time series of ISM PMI: 1946-1958, 1980-1991 and 1991-2001. It also shows the incomplete cycle that began in December 2008. It is again clear that major peaks and troughs align across the cycles. What is of note is that cycles that begin their respective higher order (30 year) cycles, such as the 1946-1958 and 1980-1991 cycles experience deeper retracements to the initial surge off the cycle low, compared to the 1991-2001 cycle (which is in the middle of its higher-order 30 year cycle).

According to the cyclicality thus established and demonstrated, we can expect either protracted stalling of ISM PMI around current levels (basically, hovering around 50) for the next 12-15 months or, with higher probability, a rather deep retracement, possibly as far down as low 40s or high 30s. Needless to say, this will be a very big surprise to risk and related markets, which are priced for a rather ambitious 3.5% or so growth for 2010. Again, if the economy proceeds to develop along the lines that are typical, we should expect the ISM PMI to drop into late 2010, and then rise into mid 2012. After that, we should have anaemic "teens".

In summary, we can expect continuous weakness in the ISM PMI from now on, for at least 12 months.

I hope this was enjoyable, informative and clear.

If you have any questions, please write to me.

Thank you and have a great week,

Aidyn.

Right Shoulder pt II

BOTTOM LINE: Markets bounced as expected, and will likely continue moving higher in a choppy [corrective] fashion. This will form the "right shoulder" on the charts. I expect this to last into early next week.

Below is an hourly chart of the German DAX. I consider this index to have topped on October 23, and since then it fell in an impulsive fashion. This will now be corrected, likely pushing the index another 100 or so points higher.

I believe markets will be pulled higher by the Energy sector (third biggest), as oil (shown here on a daily chart) pushes higher towards $85. This will then set up a nice top.

Right Shoulder

BOTTOM LINE: Markets have been moving beautifully along the expected lines. Right now, there is a strong chance of a bounce of about 3% in G7 equities. I expect this to last into early next week. It is likely that this push higher will be led by crude oil moving above its recent highs.

Below is a daily chart of the German DAX. The index, like many others, has now breached very important supports - the rising trendline from the March lows, as well as the 55 day moving average. I expect some sort of consolidation to now take place, which could take the index about 150-200 points higher. Eventually, I see this index falling to at least the 200 day moving average through November.

Crude oil (on the daily chart below) has likely completed wave four of its unfolding leg higher. It will now likely proceed to make a new high above $82, and could extend as far as $85. This will likely pull equities higher, and coincide with [corrective and temporary] weakening in the US Dollar.

BOOM!

BOTTOM LINE: There isn't much for me to say. All views remain unchanged from a week ago - buy US Dollars, sell everything else. In FX, the dollar likely finished an impulse higher, and is now due for some corrective weakness. Equity markets should consolidate around current levels, and then continue lower.

This is a daily chart of the German DAX. It is now very likely that an intermediate-term top has been put in on 20 October 2009. I expect sustained weakness here.

In the Process

BOTTOM LINE: My views remain unchanged - asset markets are in the process of peaking or have peaked.

Just one chart today - a 30 minute chart of the Shanghai Composite Index (courtesy of an old friend). I think it is one of the cleanest charts out there, and looks very ready to begin the decline.

And So It Begins.

BOTTOM LINE: Most asset markets have likely peaked. Bounces should be SOLD. Range breakdowns should be SOLD. Range breakouts are most likely to be false breaks, and should be SOLD. Sell everything and buy US Dollars.

Below is a daily chart of US Financials. This index looks really, really tired. Remember, this is now the second biggest sector in the US, with 14.9% of market capitalization. The first is IT, with 18.9%, Energy and Healthcare are both around 12.5%.

This is an hourly chart of SP500 futures. A bounce from here would be a gift to the bears, and should be SOLD. Chances of re-test or take-out of the highs are very slim, but should that happen, the market should be SOLD.

Peaked pt II

BOTTOM LINE: There is no change in my view or positioning - risk markets have likely peaked or are very close to peaking. This is the market that should be sold on new highs or sold on breakdowns through previous lows.

As there is no change to my broader "risk" markets view, I ask you to refer to previous posts for the outlook.

One of the charts that is out of sync with the rest of the market is Oil (and some other commodities). I currently expect oil to fall towards $76 and then it would be fitting for it to rise towards $85. With such an outlook, it might be difficult for equity and risk markets to sustain weakness, unless recent correlations break down. This is of course possible, given oil and equities moved in opposite directions prior to oil's final peak around $147 in Spring 2008.

Below is a daily chart of crude oil.

Sell the News?

BOTTOM LINE: Markets are quite extended to the upside. Even stellar earnings results (so far, AAPL, GS, JPM etc) fail to push the broader market higher. Structures on everything I follow indicate that corrections to the move that began in early October are imminent.

Below is an hourly chart of e-mini S&P500 futures, with my count as of 5 October 2009. While the index is trading about 1% higher from my projected levels, and took slightly longer to get there, I maintain my bearish outlook. My confidence in this call is very high.

This is an hourly chart of DJ EuroSTOXX 50, and the index is basically flat relative to where I thought it would peak. This structure is very tired, and I cannot see how it could rally meaningfully without at least a 5% correction first.

Peaked

BOTTOM LINE: It is highly likely that European stock indices have peaked for a 10%+ correction. For this view to hold, last Friday's levels should not be seen again. Also, gold and silver likely peaked too. I maintain that even if we do trade above Friday's levels, it will only slightly postpone a significant correction.

Below is a daily chart of the Financial Services ETF in the US. Further to my Thursday 15 October post, I believe this sector of the market has topped. My confidence in this call remains very high.

This is a daily chart of Silver. I believe that it has topped. There is a slight chance of a marginal new high, but I cannot see any sustainable upside. Downside risks are huge.