It may be true to say that as far as the financial markets are concerned, there is very often nothing more difficult than trying to get a handle on a straight move. In terms of the context of the major indices, over the past few months since the early November “fiscal cliff wobble”, we have been treated to a near vertical climb that has taken the US indices and selected European ones back towards the all time nominal highs. It is indeed a very rare occurrence that conditions are so benign that to date, since the start of the New Year, we have not experienced a short term proper correction to the sharp up move see – a situation that is causing consternation for many stale bears now and, I suspect, prompting a few to capitulate. Patience I say!
Nikkei 225
The Japanese stock market, as we all know, has been in a long, long bear market since peaking just shy of 40,000 in 1990. We have had the thick end of a quarter of a century’s worth of false dawns – now that is what a proper bear market is! Pundit after pundit has lost his reputation calling an end to this almighty bear and perhaps I am about to lose mine but, I think we have certainly seems the lows of this bear market now and the bottom is in. Famous last words!
Looking at the daily chart and we can see there has been a serious rebound in the last 3 months – a typical sign of the end of a bear market as bulls scramble for stock. I believe that we are likely now to enter a consolidation phase and the Nikkei will remain locked with the movements of dollar yen – as the FX pair falls, so goes the Nikkei and vice versa.
In recent days we can see that the index has pulled back from a relatively obscure red March 2011 resistance line at 11,500. What I would say now is that while there is no end of day close back below the 20 day moving average at 10,935 there could be at least a retest of 11,500 during the rest of February. The best case scenario on offer for the bulls currently is a meeting with the top of the 2011 price channel as high as 12,800 – probably some time in the 2nd quarter.
FTSE 100
The charting position of the FTSE 100 is not a million miles away from that of the Nikkei, at least over the past couple of months. What we see here is a knockback from the top of the near term rising trend channel – in this case from April 2012 and with 6,350 being the resistance line. So far, the index has managed to find support at the grey 20 day moving average – now at 6,223 and this stemmed losses during the middle of this week.
The falling RSI is however a warning sign we should heed, and any move back to test the 6220/30 zone will be a sign that a more serious correction is underway. In the near term however, a retest of the recent highs around 6370 is likely and indeed a possible move through 6400 to catch the last capitulators cannot be ruled out. This would be my proper cue then to get short and this scenario could come to fruition going into the February options expiry next week.
Dow Jones 30
For all you traders that continue to play the Dow either via CFD’s or spread betting – good luck is what I’d say here! This is without doubt the hardest of all the indices to trade, particularly given that it is an arithmetically weighted index and not market cap weighted – this gives rise to distorted moves and it is not a good representation for corporate US. Nevertheless, it is a popular index that punters love to play.
With all the major U.S. equity benchmarks making post crisis highs in the first several weeks of 2013, expectations are high presently that the bull market will continue. This is a warning sign and quite probably an almighty bull trap. What will be absolutely key for the Dow throughout the rest of this month will be a resolution as to whether the bull flag this market has been in over the past couple of weeks will break to the upside and lead to a possible blow off top towards 14,500, or even higher. As As with the Nikkei and the FTSE 100, it would appear that while the index remains above the 20 day moving average what we are likely to be treated to further upside even through many traders are likely to be suffering a sense of vertigo. Personally however, I would look for an extension of 3 or 4% above here on a final short squeeze as my cue to really get short.