weekly market update: on long-term forecasting with short-term chart analysis

I will mainly address short-term chart analysis in the early part of this article. Before I get too deep in to that, I will note that for the last several weeks I have emphasized my expectation that stock prices in the US (and many other places) would be making a minor rebound of unknown duration, with a very high probability of eventually manifesting a sharp and lasting decline.

I have not, generally speaking, emphasized in my recent blogs exactly how I formed that expectation weeks ago (or why I continue to maintain it). However, I have repeatedly commented on various things that I have seen (including in price charts) that I consider supportive of my general expectation.

My long-term expectation is immensely important to me and so I consistently monitor data that MIGHT result in me “softening” or even “withdrawing” that expectation. While such a development might be very rare, it is certainly possible. Also, data that I consider relevant COULD include short-term chart patterns (though NEVER as a priority).

Generally, I don’t think of chart patterns as reliably predictive. They are valuable for two things mainly to me: (1) evaluating the potential that a longer-term expectation MIGHT be about to manifest and (2) altering positions as a new trend clearly MIGHT be beginning, then clearly is underway, or clearly may be reaching a significant interim reversal or a final reversal.

Now, let’s glance at a raw chart (with no commentary) of about the last month or so of prices in the broad US stock market. Look at it knowing that (1) I have been expecting an eventual downturn that is sharp and lasting and (2) that I am looking at the chart patterns for indications of any recognizable patterns including shifts in momentum.

What do you see? If you described the shapes, what would you emphasize? If you were making notes about what is notable overall in the chart or at various points, what might those notes be? (Before reading further, feel free to actually type up or record some audio comments of what you notice.)

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Here are some of the first things I notice:


The dominant feature in this chart is marked as #1 above. The entire remainder of the chart seems to me “secondary in prominence.” although you can read what I wrote as the #2 and #3 details.

Did those features also “jump out to you” before I mentioned them? Or do they seem notable only after I mention them?

Considering the horizontal line going across the chart (because of current prices, not because I added that emphasis), it also seems rather obvious to mention the two orange arrows plus the final yellow arrow. Prices have repeatedly rose to that level. Then, at least so far, prices have repeatedly fallen from that level. As shown here, it also appears that the second peak was barely higher than the first, then the third was barely higher than the second.

While you would not know the following from the visuals, that pattern of very brief rises that barely exceed a prior high is generally consistent with what I would expect from an “exhaustion rally” (as in a rally that would precede a long and lasting decline). Next, let’s look at another pattern that I do not expect most people to notice until I point it out. Not only do I consider the 3 arrows above to fit with a single exhaustion rally, but I see at least 8 small “exhaustion rallies.”

The rises have repeatedly been small and slow, followed by faster and/or deeper declines. The two main exceptions to that pattern have been during what I marked as 2 and as 3 in this prior image:

So “items 2 and 3” are relatively prominent, but we also see that they are in certain ways exceptional to the overall pattern within the chart, which is lots of small, slow rises each followed by faster and/or deeper declines.

Again, I have not at all explained why for several weeks I have been anticipating an eventual decline in stock prices. However, even if you had no knowledge of that fact or any respect for the detail that I formed that expectation (like due to a review of the last few years or decades of my forecasts), couldn’t you begin to make “educated guesses” about the details that I have now marked in these various images?

Now, once again look at the raw unmarked chart. Can you “unsee” the things that I just emphasized?

Or, is it now obvious that there are a variety of details that all indicate that prices recently could correspond to an “exhaustion rally?” If I say “what are the 1, 2, and 3 biggest moves in this chart,” can’t you easily see them? If I ask for a comment on how we might interpret the “overall message” of 1 and 2 and 3, what might you say?

What about the dotted horizontal line? Can you look at it without seeing the two prior peaks (which were marked with the orange arrows)? What “overall message” might that series of peaks present?

How about the 8 small “exhaustion rallies?” Can you on your own easily find them and count them? What “overall message” might they offer?

Of course, this chart analysis is quite subjective and interpretative. Of course once I point out some detail and comment on it, then you must be biased to be attentive to that detail (whether to agree or argue against or whatever). But if you looked at those charts again in 10 minutes or 10 years, the features that I mentioned would all be easy to recognize… whatever you might think as of now about the interpretations I have presented in regard to any particular feature.

So, still without getting in to WHY I formed a longer-term expectation for a long and lasting decline in stock prices, soon we will look at a chart of a longer period of time. (And on facebook posts and in prior blog posts I have sometimes mentioned SOME of the data that I have monitored to inform my longer-term expectations.)

A key detail is that even if prices rallied to higher levels than the early June high (at the far left of the charts above), then that would itself do absolutely nothing to change my long-term expectations. That would simply mean that all the small “exhaustion indicators” referenced above were “simply a bit early.” They are still CLEAR indicators of a sequence of “minor” exhaustions… which ultimately may either be categorized as “the initial stages of a more significant exhaustion / shift” or “early warnings that preceded those initial stages.”

So, chart patterns do NOT “predict the future.” However, they can be useful to confirm or contradict the potential for an imminent manifestation of a longer-term expectation.

This chart covers the same stock index (the S&P 500) across a few years. The last few weeks at the far right are barely recognizable (relative to the more detailed charts of that time period that we have studied above).

So what are those 2 lime green arrows? Clearly, they precede the 2 largest and longest dips across those years, right?

What if I clearly and repeatedly published predictions of large and long dips in prices just prior to those dips? What if you have even read some of those forecasts (whether when I made them or later)? Or, what if I said that I would be happy to send you links to the alerts I posted just prior to those dips (as well as the reports of the profits available during those dips)?

Would any of that increase your interest in what I say about the near future? Would that increase your interest in any warning I might have been making in recent weeks about another large and lasting decline?

For your sake, I hope so. Indeed, for my sake, I hope so as well.

Before I conclude, here is another chart to which I will not add any highlights. It is a few weeks of time only. It is not a stock index.

I removed the main labels from that chart. Whatever market is charted there, I would not be surprised if it imminently rises to higher than the peak in late June (to over 41.50). However, I would also not be surprised if it made one more “minor high” (to between 40.80 and 41.50) and then plunged.

Considering my comments on the stock charts above, can you see anything “contrasting” about that chart that might correspond to an expectation of a higher potential for “1 more high” in that chart (whether above the high a few days ago or above the 41.50 high a few weeks ago)? Are there signs of “strength” or “resilience” or “increasing momentum” in that market that are not visible in the prior charts of stocks?

What about this next one? Again, the chart patterns to me are simply not as clear / prominent in this one. So, I would not be surprised for prices to rise to over 1.13 again (or even over 1.135). However, I am very clear about where I expect prices to be in a few months for this market.

Here’s another (covering more like 2 months of time). I have repeatedly commented on my forecast for this one in recent weeks. Even if you do not know what that forecast was, what do you see when you look at these shapes? Could you comment on “internal momentum” or “signs of exhaustion?”

While this next chart (which we already reviewed) shows a shorter range of time than the one just above, see if you already noticed some similar features to what are apparent in this one:

Ok, here is the last new one. Again, I have been very clear in my commentaries about where I expect this one to be several months from now. Even if you do not know what that forecast was, what do you see when you look at these shapes? How is momentum changing across the time period shown?

So, do I see things in these charts that fit my comments across the last several weeks? Yes I do, over and over and over. My longer-term expectations are either clearly supported by price movements in recent weeks or something else (like clearly contradicted or not especially clear).

Now, because I know what my clear expectations for all 5 of those markets are (and why), it is easy for me to study a few different time periods in each market to look for signs of waning momentum (of exhaustion) or signs of steady or rising momentum. I could show many more charts and highlight many more details. But I will not here and now.

Instead, I will close by saying that chart analysis had absolutely no role in me clearly forecasting, weeks in advance, these 2 long and deep dips shown below. However, because I was expecting those dips, chart analysis was quite helpful in the timing of my specific positions in the various “stages” of those dips. So, I consider both long-term forecasting and short-term chart analysis to be quite valuable tools.

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