Zak Mir – Global markets special & the meaning of Marubozo

It has been quite a week from my perspective as far as the major indices have been concerned, at least  as far as trying to make an accurate call on their price action. Why is there a particular problem at the moment?

Could the fact that equity indices are now sufficiently off their highs of 2013 be presenting yet another opportunity of a dip to buy into?. Many are equally asking the question that as we approach the “Sell In May” period, is being short, finally, the more comfortable stance? When you add in the cruelty heaped upon the ‘gold bugs’ this last few weeks with the de facto crash in Gold and other mining stocks , it is not an easy decision to want to get involved on the long side given the drag that the precious (and not so precious) metals could still have on indices.

But if the markets can be described as a game of chess , one where you are obliged to plan your strategy many moves in advance, it can be said that the focus as far as I am concerned, certainly  from Monday’s close on the Dow, that the ‘move’s now is just how far are the UK & US markets set to decline in the weeks ahead?

To me, last Mondays price action on the Dow delivered no less than three simultaneous sell signals. The first was that it was the end of day close back below the initial 14,684 high of April. The second that a December RSI uptrend line was broken at 55 and the third, being the most important, this was the daily candle which was a near perfect Marubozo, i.e. the open was the high, and the close was less than half a point off the low – which is one of the deadliest  of sell signals. To give you an idea of how this worked recently on the FTSE 100, April 3 delivered a near perfect Marubozo of its own and it promptly fell 200 points in just 2 sessions and has thus far been unable to claw back the 6,420 close of that day.

With the Dow it has been somewhat different, with Tuesday registering a swift 157 point rebound and so contrasting with Monday’s 266 point fall. I found this suspicious, remembering that consecutive Marubozo candles spell danger and indeed severe danger when the floor of the first candle in the sequence is broken.  It looks like the PPP (plunge protection team) rode to the rescue again… The key level to what for here is a break of the 14350-400 level – if this is penetrated then we are looking at a sharp  move down to the late 13,000’s. Only an end of close move back above 14700 will negate the picture and take us back towards new nominal highs

Moving onto the S&P, which is very often a good way of checking to see whether a signal on the Dow appears valid. We had Thursday’s session serve up a double bear trap rebound: breaking temporarily both the March 1,538 and April 1,539 intraday lows via a 1,536 intraday low. The trade now following Fridays price action is to go long, with a stop at an end of day close back below the 1,536 level. But I find myself leaning towards short tack, at least while there is no break back above the Monday 1,552-5 floor. The fact that the RSI is at 44 and significantly below the neutral 50 level backs the idea that even if the S&P manages to rehabilitate itself, we have further downside to explore towards the February 1,530 peak.

Perhaps the most puzzling of the three equity benchmarks I am looking at today is actually the FTSE 100. You might have thought that with its gang of dodgy central Asian mining companies weighing it down after the plunge in precious metals prices we would have seen the 2 month support zone at 6,220 melt away like butter. Instead, the impression given is that we have solid support here even though the chart pattern since the beginning of February consists of a head & shoulders, or more accurately a head & double shoulder reversal pattern. Therefore while I concede that 6,220 may not be broken on a sustained basis, if it does, the downside could be painful and so usher in a retest of the key psychological 6000 level.