Technical Market Report 20 December 2009

Last time I wrote, the Dow was at 10318 and the FTSE100 at 5251. They now stand at 10328 and 5196, so there's little change compared with four weeks ago. The overall uptrends are still absolutely intact, and in fact if one looks at the S&P500 chart, there is a clear congestion area which should function as a continuation pattern as the price tends to come out of them the same way it went in. No doubt the other indices will follow if this proves to be the case.

Using one chart (in this case the S&P500) to provide a clue for a highly correlated chart (the Dow) is a powerful technical analysis technique. Sometimes a pattern is a bit clearer, or a little closer to completion, on one chart than another, and provided those two charts are highly correlated, if you are right about the first, you will almost certainly be right about the other.

In my last report, Gold stood at $1150. I said that "The price is very extended in the short-term, and I think a correction is needed very soon to unwind the overbought condition." The price in fact carried on upwards to $1216, where it was, of course, even more extended, and we then saw a sharp correction down to $1098. The price has rallied a bit to $1112, but the speed of the correction has taken a lot of the momentum out of the market, and it will now take a few months I think before the overall uptrend can resume. This is still a bullish chart in the medium-term and beyond, but for now I think some "time out" is required and I would expect a consolidation pattern to form in the shorter-term.

The most interesting development since my last report amongst the markets I follow is the Large Contra Move signal on E/$, now at $1.435. We've seen a strong uptrend on this chart since March, with a good consistency in the corrective moves. The Point & Figure chart now shows a corrective column twice as big as the average size of the preceding ones, and this defines the Large Contra Move reversal signal.

By contrast, the £/$ chart, currently $1.615, is still rangebound. However, we can infer from the E/$ chart that the most likely direction for the time being is down, employing the same idea as explained above for the indices. It would take a close below $1.58 to break out of the range which has been forming now for five months.

2009 has been a very good year for the column in terms of its primary objective - calling the major moves in the key stockmarket indices. While many investors/fund managers/commentators/analysts are still not calling or playing the bull market, we have been able to identify it as such primarily from the Coppock signal in May, and then a couple of months later by the nine-month head & shoulder bottom patterns. This evidence was very strong indeed - two signals, which in their own right are highly reliable, appeared together, giving us a really compelling case.