The writer is a technical analyst, Borsa Graf, from the Guiding Group
What is technical analysis?
A method for making an investment decision in the capital markets, which is based on market behavior. The graph is the final result of the decision-making equation of all investors in the market, thus embodying all the information relevant to the decision
My last analysis about the American market was not correct, and I must recalculate a course. What appeared to be positive signs, which were supposed to lead to a wave of gains, soon turned out to be a false signal. A positive week ended with a red candle, which represented a clear control of the sellers in the arenas. Interest rate or not, the technical equation has reopened. It is not completely negative as one might think, but the level of risk has increased and investment decisions must be taken with great care.
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At the same time, I have written more than once that the American stock market is still not on the rise, and the level of risk remains high. As long as the long time dimensions are left, i.e. the quarterly and monthly graph, as they are, expect false signals.
The importance of the repair sequence
The main question was and remains regarding the willingness of the buyers to arrive at a higher price than the one they purchased last time. The low point of the S&P 500 index from June this year, 3,886 points, is the basis for reference.
A low point occurs when there is excess demand and declines are halted. Therefore, determining a low point higher than the previous one is a necessary matter to understand the direction of the market. In the last analysis I estimated that such a point was determined, although it did not actually happen.
These are the elements that should be paid attention to again: the first and most important element – the wave of gains that carried the S&P 500 index over the last few weeks from a low of 3,886 points to a peak of 4,325 points. This bullish wave lasted for ten weeks without any correction.
In order for another rising wave to form, several things must happen: First, the current downward trend must be stopped above the previous low point. That is, above the level of 3,886. If this happens, it will be an expression of the willingness of the buyers to purchase the same goods at a higher price than what they were willing to pay in the past.
The low points in the market belong to the buyers. One of the few things that has survived the test of time when it comes to market behavior and conditions of uncertainty holds that whenever a low point is created that is higher than the previous one, there will also be a high point that is higher than the previous one.
The second component is the duration of the repair. In an uptrend, and this is true for any asset, the rising streaks are longer than the falling streaks, both in terms of price and time. The duration of the ascending sequence was ten weeks. Which means that the current correction should move around five weeks with a deviation here or there. In any case, its duration should be shorter than ten weeks.
The next component is the ability of the market to stay above the lower band of averages. This will indicate that the accumulated positive momentum has not been substantially impaired.
And the last parameter is the trading cycles. These should shrink during the correction, as evidence that the supply available for sale is running out.
In the meantime there is not enough momentum
The level of risk that the American stock market offers is high. This is derived from the behavior in the long time dimensions, and for now, the weekly chart fails to generate enough momentum to turn the bowl upside down. I will continue to follow and bring you the important parameters every week.
Gold: pullback below the support level
In the middle of June, I wrote in a review about gold, that there is nothing like the long graphs to understand processes, which, unlike specific reasons, are a critical matter for making the final decision. And the reasons most of us look for when there are declines, but abandon this search when there are rises. This whole story is actually a search for certainty. The main message in June was that the direction of gold is down, with the main obstacle being the support level of $1,700 per ounce. The breaking of this level, I estimated, is only a matter of time.
During the last month, the price of gold retreated below the aforementioned support level, and the trend will continue to deepen.
How deep will you go? History has taught us that periods of shuffling represent a balance between the forces of demand and supply, in a situation where the two dominant groups that drive the markets hold a different opinion about the direction of the market. The end of the shuffling period indicates the start of a move that in most cases can be calculated. This move will be the same in length as the depth of the shuffle, that is, the longer the shuffling period, the longer the move will be.
Shuffling depth – about 300 dollars
The depth of the shuffling of gold, as expressed in the course between $1,975 and $1,700 per ounce, stands at $295. A break of the $1,700 level per ounce (rather than $1,699) will lead gold south by at least another $295, that is, to the $1,400 per ounce area.
So, as mentioned, we have a long journey to the south ahead of us which, in my opinion, will not happen quickly, but as the behavior of gold shows, it is probably inevitable.