Charts don’t lie: my new targets

Today, we’re going to revisit a neartermed sell signal that I recently posted. Then, we will talk about some targets for this correction.

Last week (June 16), I posted a blog illustrating my neartermed timing system chart.  My system was strongly suggesting a correction was immanent. So far, it appears to be correct. Charts don’t lie. While charts don’t lie, the headlines can indeed steer you wrong.

Interesting headline below from CNN last week. The bull is back, it says.  But on the same page, their Fear/Greed index (see my book Smart Money Dumb Money) showed extreme greed (not a bullish thing….).

 

Back in May, the headlines were quoting experts predicting a summer rally (this, despite overbought conditions and traditional seasonal softness during the summer months)

 

Why I expected the market to correct

I noted two important points on my blog last week. That is:

  1. Too much optimism for declining inflation and softer monetary policy
  2. An overbought, overly complacent investment climate.

1. Inflation and monetary policy

As market participants celebrated the supposed bullish CPI report and their hopes for an end to the tightening policy after the Fed meeting last week, I quoted sources (BearTraps, WSJ, etc) who had opposing positions. That is, core inflation was not budging, and that we should expect 1-2 further hikes this year. Say it ain’t true!

Well….Sure enough, this weeks meeting with Powel had him impressing upon the market that there were more hikes to come. Today in the news:

2. Overbought, over exuberant markets

Next, I noted that my neartermed timing system was screaming for a neartermed overbought correction. Primarily, I emphasized, the bigger risk being the technology sector. That implied a correction for the SPX and the NASDAQ, which are heavily weighted in tech.

In that argument I also noted that many of the sentiment indicators that I follow were screaming “greed/complacency” by market participants. That is, I referred to low VIX levels, and Smart/Dumb Money indicating a high potential for a correction. These tie into the CNN Fear & Greed complacency reading referred to above.

My observations and target for this correction

Here are my bullet point thoughts – using the SPX as a reference.

  • Downtrend of 2022 is over.
  • Basing stage is finished. A breakout through the neckline at 4200-4300 is confirmed.
  • Mid-long termed indicators suggest bullish environment: MACD (long termed momentum) and Accumulation/Distribution (moneyflow) suggest this breakout is real.
  • Shorter and mid termed indicators suggest neartermed pullback: Moneyflow momentum (top pane), stochastics (first pane under price) and RSI are starting to roll over from overbought conditions.
  • These factors on the weekly chart confirm that the neartermed timing system sell signal above (BB, stochastics, RSI on daily chart) is likely to carry forward as a correction, but not a new bear leg.
  • Technical Analysis 101: Old resistance becomes new support. That lies in the 4200-ish area. The 10-week/ 50 day SMA lies there as well, and it has offered support through the recent rally.
  • Target: 4200, give or take. Timeframe: I’d suggest that this correction is already in play.

Keith on Bloomberg BNN Monday

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7 Comments

  • Hi Keith,
    What are your thoughts about the downside target of the TSX? It broke through and closed below 19,500. With the S&P 500 still above 4,300, it makes sense that there is likely more downside to the TSX.

    Reply
    • There are a few pretty decent levels of support on the TSX right now–19,200 being a significant one. The TSX looks to be a swing-pattern index. Probably will find support shortly, and could actually swing back to 20,000 or higher ($21,000 top). Especially if the market loses focus on technology and begins searching for value. Having said that, you don’t want to see a breakdown on the TSX below 19,000 or you could be looking at the COVID crash lows!

      Reply
  • The above data tells the whole story, good job!

    Unfortunately, will investors be disciplined enough to stay in case
    and get the 5% money market or bond return in place of jeopardizing their capital ?

    Or will they ride the chat-gpt bubble that many believe can go a lot higher before crashing down to zero ? Will they ride the bubble and cash out their chips before the casino wins the bet ?

    Sadly, the TV pundits (CNBC, Bloomberg, etc) only focus on the
    Nasday index, there mere is representative of a handful of Chat GPT stocks that will not survive a correction, such as NVidia, Google, Amazon, Netflix, etc.

    Strangely, Facebook has been going up, lacking Chat GPT technology.

    As Ross H said on Market Call, ” this is a good time for retail investors to sit on the sidelines in stocks”.

    If you must spend, then the Canadian stocks , not USA traded ones, have tons better upside..at least that is a relief of some sorts.

    Reply
  • Hello Keith, thanks for everything all the time ! I’m reading and watching every blog/video as soon as they come out. I would be curious to get your view on the following situation: Long time ago, I noticed that the price movement of an Index/Sector and its Bullish % were most of the time in sync. Using some Technical Analysis indicators such as the Bollinger % 50,2 (Stockcharts) on the Index/Sector ticker or an ETF related to the sector and on the Bullish % of this index/sector, I can see that major tops and bottoms are in general in sync.

    For example, these days, Techno, Nasdaq seems high… while Utilities, Staples, Gold miners seems low… But I’m looking at Real Estates and while the sector seems pretty low (MFI 10 and Bollinger % 50,2 on ticker $SPTRE), its bullish % seems to keep being ”high” ($BPREAL). What would be your interpretation on this ? Would you expect the Bullish % to start going down.. or would that mean that the correction on the Real Estate sector is exaggerated and that it should bounce back fast (for example ETF ZRE.to or XRE.to) ?

    Reply
    • Hi Lou–wow–in depth question!!
      Bullish % is used more by P&F people looking for a “breadth” indicator using P&F buy signals. See my interview with John Copp. I’m not so much of a P&F guy, so I cant offer much experience in interpreting it in your example of the real estate sector. I do however like the traditional momentum indicators as you probably know, including the MFI moneyfolow momentum indicator. I’ve found it pretty good at spotting overbought/oversold signals, and true to your point–there’s an oversold signal on the sector right now. Will (eg) XRE bounce? Actually, it just may do so. Its set up for a move, although it may not be big enough to play.

      Reply
  • Thank you very much Keith. I didn’t want to go too much in details but similarly as the P&F charts, which I tried and didn’t feel too comfortable (I watch the interview with John Copp… very interesting), I trade only ETFs using a 2 steps strategy (daily timeframe) :

    1. Identify potential tops or bottoms (better probabilities):
    I use the RENKO view with the indicator Bollinger % 50,2 to spot tops or bottoms on the Bullish % of an Index or Sector, and on the VIX. I use Heikin-Ashi view with MFI 10 and Bollinger % 50,2 to look find extremes on the Index or Sectors themselves. When all extremes are reached on a sector or Index, this tells me to put that Sector or Index on my watch list for entry point (gradual entry). It doesn’t tell me to enter right away as extremes can last for a while and go further.

    2. Enter the trade
    I use Heikin-Ashi view and look for 4 indicators : Williams %R 10, STO RSI 12, Price Channel 7 (median line) and the color of the candle. I consider as well CanadaBulls.com opinion on the ETF, I consider your analysis, Seasonality from EquityClock and Brook Thackray opinions. And then I make a decision is I enter the trade, partially or fully, Then I monitor the daily graph to stay, exit, take profits or a loss, or leg in…

    Bunch of details sorry. Just interesting to chat about TA. You don’t need to publish this post.

    * I read your 3 books and it’s really my type of stuff. Thanks !

    Reply
    • Thanks Lou–the main thing is you have a system, and it very much appears you do. And I’m happy to hear you liked my books. As I’ve grown older (and wiser?) –my mission has changed to helping others in their own quest for TA knowledge. It helps to hear positive feedback on the books-thankyou for that. BTW–it also helps to write a review on Amazon!
      Keith

      Reply

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