I remember reading about the "Hindenburg Omen" in 2010, and to be honest I found it confusing. But below is something I do understand. I don't know of any other omen that compares to what I currently see on weekly charts across the globe. I prefer to keep this blog focused on futures analysis, but what I am about to share is so glaring I felt it had to be posted. Take a look below at all the Bearish "Head and Shoulders" patterns of these various "Exchange Traded Funds" that cover major markets on every continent.
(Click on weekly charts to expand)
EWZ - Brazil
EWQ - France
EWG - Germany
EWU - United Kingdom
EWJ - Japan
EWC - Canada
RSX - Russia
GXC - China
EZA - South Africa
EWA - Australia
EEM - Emerging Markets
IEV - Europe 350 Index
AFK - Africa
One of my daily reads is "Dave's Daily". Besides the fact that I think Dave Fry provides the best commentary in the history of this business, for almost every trading day his daily has a run down of weekly charts across a spectrum of ETF's that include currencies, commodities, bonds, and equities.
What is a "Head and Shoulders" pattern? It is a graphic representation of supply gradually overcoming demand. It is also known as a five point reversal pattern found at market tops. What it often shows is "distribution" from smart money to the not-so-smart money. Most investors who have bought these indexes are going to be feeling the pressure of losing money on a breakdown of the neckline. The neckline is a trendline that connects the two low points in the valleys between the "shoulders" and the "head" of the formation. When price breaks through the neckline it is a signal that a market is potentially going from the horizontal phase of development (range bound) to vertical development (trending).
I will be on the lookout for an "Igniter Move" beneath the necklines, which is a large bodied candle that is accompanied with an increase in volume. While it is not necessary, nor is it a guarantee that the market moves lower in such a case, I do find that the odds increase significantly when there is an igniter move off a major pricing pattern. When markets start heading south off a head and shoulders pattern, buyers can step aside, and the sellers can panic for psychological reasons. What do these specific actions from the buyers and sellers do to the "price" of a security? It sends it lower until the market determines that the price is now at an "unfair low". An unfair low cannot be determined beforehand, although I do use the "Measured Rule" to determine an initial profit taking target. This has nothing to do with fundamentals but rather the laws of supply and demand.
The Head and Shoulders pattern is only bearish when the neckline breaks down. Trading in anticipation of pricing patterns being fulfilled is a good way to lose money. I want to wait for the "probabilities" to be on my side. That means staying on the right side of the order flow. Right now these charts are just a warning in "randomness". I am not predicting anything. It may or may not be wise to build a cash position based on each person's different investment objectives, tolerance for risk, time horizons, etc. For all we know, the markets will make a new high prior to any confirmation of a bearish reversal pattern. Ok, so why am I pointing these out then? Because intuitively identifying patterns early helps to develop a trade plan early enough in order to react or strike when opportunity presents itself. I am not interested in being caught with the "deer in the headlights" look when trading.
Most of the auction market analysis on this blog has been on the "daily" and "thirty minute" charts since I am focused on day trading, however I believe the ultimate trading signals for long term investing or trading are on weekly charts and they should not be ignored by anyone in this business.
Lastly, I get emails or comments on the blog from readers who believe that there is central bank intervention, manipulation, or how the Fed has to prevent deflation with more "QE" etc. Let me just say that the last thing in the world I am ever and I mean EVER going to do is think I am smarter than the market. I want to stick with what is in front of me right now on the charts... period. The day I develop a trade plan with leverage that is based on what I "think" the market "should" do or should be doing is the day I go broke. Unforeseen or unexpected adverse price movements happen and are the reason why a trade plan has to be developed with proper risk management, money management, position sizing, and trade management principles.
Finally I will leave you with one last chart with a question... Is India leading the way?
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