By Alex Roslin
Investor’s Digest of Canada
So it is a bear or not? This has been the question rattling investors for months. Some analysts say the answer might finally get a whole lot clearer very soon as markets near key inflection points on the charts.
The debate isn’t new nor has it been easy to resolve as soaring volatility catches investors in wrong-way trades. When markets sold off sharply in early 2007, some technical analysts were quick to declare the bull market was over only to see major stock indexes worldwide snap back and power to record highs. Oops.
Then, when markets got kneecapped in last summer’s credit crunch, many technicians emerged again to pronounce the bull really dead this time. Alas, just as the panic really set in last August, markets rebounded nicely.
Since last fall, however, stocks have veered around drunkenly in a yawning trading range, with volatility shooting through the roof, making the debate even harder to resolve. “What a sick beast this is,” wrote professional trader Stephen Vita in a post about the volatility on his AlchemyOfTrading.com website.
Mark Arbeter, chief technical strategist at Standard & Poor’s Equity Research Services in
But some analysts say the charts are now starting to point to some bullish signs for the markets—though their optimism is still tempered by a lot of caution.
By one of the most commonly accepted definitions of a bear market—a 20-percent price decline—the bull does lives on by the skin of its teeth. The S&P/Toronto Stock Exchange composite index lost 18 percent from its July high to the low in January—short of bear market territory—and has since recovered most of that decline.
In March, the S&P 500 traded briefly 20.2 percent below its October high after news emerged that investment bank Bear Stearns had almost gone bankrupt. But the day’s close was above that crucial threshold.
Tom Bulkowski, a guru of technical analysis and author of The Encyclopedia of Chart Patterns, says he would have turned bearish if the S&P 500 had closed the day below the 20-percent line. As is, he believes it’s still too early to tell which way the trading range will break, though he leans to the bullish side.
Bulkowski has studied thousands of commonly watched chart patterns and done what no one had systematically done before—actually figured out if they work. He can tell you how often a pattern leads to an upside breakout and how far it’s likely to go up. He also likes to study how often breakouts fail and what happens then.
He sees markets like the S&P 500 (tradable in
In 900 such patterns he studied in bull markets, 74 percent resolved themselves with an upward breakout, says Bulkowski, who publishes stats on dozens of chart patterns at his website and blog, ThePatternSite.com.
The target for such breakouts is for prices to rise by the same amount as the height of the triangle. This happens three-quarters of the time, Bulkowski found. In the case of the S&P 500, that would mean about 130 points, or a 10-percent gain. Such a rally would take the index to around the next area of overhead resistance—the previous highs of last December.
In an especially bullish sign, XIU (the iShares Canadian SPX/TSX 60 Index Fund) and HXU (the Horizon BetaPro S&P/TSX 60 Bull Plus ETF) succeeded in breaking out upward from their ascending triangle patterns in mid-April.
Also on the plus side, Bulkowski notes a slew of bullish-looking “inverse head-and-shoulders patterns” developing slowly in recent months in global markets like
By mid-April, these indexes were nudged up against key inflection points as they strained to break upward. “They’re struggling to push through that resistance,” Bulkowski said.
Bulkowski remains super-cautious, however, and advises watching developments like a hawk. That’s because upward breakouts from ascending triangles don’t always last and can result in what he calls a “throwback”—a price decline back into or very close to the triangle.
Such fakeouts happen 57 percent of the time. “A lot of these will throw back. It could be that this is just a bear market rally. We don’t know which way it will go. The market is saying it’s not convinced,” Bulkowski said.
At S&P, Mark Arbeter is also getting more optimistic. “Stocks still have some major overhead supply to deal with, but it certainly feels like we are starting to get better traction climbing the wall of worry,” he wrote in a note in mid-April.
If there’s a rally, will it rocket on up to new highs? That’s going to be the key test, Arbeter says. He believes markets are likely to keep churning in a trading range for much of the rest of the year—a kind of “mini-bear”—then finally break out to new highs by year-end. One reason for his bullish tilt: investor sentiment has hit bearish extremes, which usually suggests a market bottom.
That’s also the opinion of Ron Meisels, president of Montreal-based research firm Phases & Cycles. “The doubters and skeptics seem to be everywhere, either advocating staying away from the markets until the negative news peters out, or even more actively talking down the markets with projections of dramatic new lows to come,” his advisory said in a note in early April.
“It’s all music to our bullish ears.”
Meisels noted that markets have held above their January bottom despite a slurry of bad economic news. However, he expects a “highly selective” and “tepid” rally compared to 2002-07. He projects unimpressive, single-digit rallies for the S&P 500 and other U.S. indexes, but better results for the TSX, which he sees eventually hitting 16,000.
But Meisels is still cautious, saying the TSX “may have to do considerable work” to overcome overhead resistance. “The bullish picture remains intact provided the S&P/TSX Composite Index remains above its March lows.”