It has been a volatile four weeks since my last report. The Dow then stood at 10211 and it is now 10198, so barely changed. However that hides the true picture - it touched a low of 9614 a week ago and at that time the chart was not looking very good. Likewise, FTSE is now at 5132, slightly down from 5163 in the last report, but again that doesn't give the whole story, which is that the index touched 4790 in line with the Dow making its low. The moves back up have swung the short-term picture away from bearish back to neutral, and we have a very finely balanced technical position. Indeed, I would say that this is the trickiest call I can remember since starting the reports in October 2006.
It's worth repeating what I said about the apparent head & shoulder top formations that have been present on both charts. Assuming we have been in a bull market (this assumption was originally based on the Coppock signal) then these top formations are quite early in the cycle, i.e. bull markets usually last considerably longer than that. As I explained last time, this is a "context" argument, and it is one of the most powerful tools in technical analysis, although I have to say it's seldom applied. What it means is that you don't just interpret patterns in the same way wherever you see them, so two similar looking head & shoulder tops might need different interpretations depending on their context, i.e. where on the chart they appear and what occurred previously. In the current scenario, the context is that of a much shorter than average bull market.
Another thing I'm very much aware of is that the market seems to be holding up against a huge expectation that it is going lower. If they were being honest, I'm sure the bears would have to concede that they have been surprised that the indices haven't broken decisively yet. There simply seems to be a reluctance to head lower in a meaningful way.
As I said, it really is finely balanced. This is a big problem analytically, because every few hundred points the balance of probability swings one way then the other. One week it might look like 60/40 in favour of a bullish outcome, the next it's reversed to 40/60, the week after it's swung back again.…
