Monday, June 18, 2012

You Are Now Here

The Russell 2000 small cap index (pictured above) was the leading index from 2003-2007 in terms of percentage gain.  Therefore, it gives the clearest picture of overall risk appetite, and because this index is/was leading, it has the clearest structure.  As we see, since hitting the 2007 high, it has gone absolutely nowhere.

The above chart also very clearly illustrates the concept of attenuation i.e. a market going nowhere, using up a lot of buying power, with each spike of shorter duration.  The green lines box out the timeframes.  "L", "H", "R" = Head and Shoulders Top (Left, Head, Right).  The blue uptrend line appears to be highly significant.  At present we are only slighty above that uptrend line and holding on for dear life.  The last time the market peaked (last August-October) and re-tested the uptrend line it clearly held, leading to the most recent Head and shoulders peak.  The question on the table is whether or not we have enough mojo to make a new 'high' i.e. a fourth peak.

Based on the updated 'BTFD' chart below, I would say not.  Unlike the last time we bounced off the trend line, this time we never got volatility, never got volume and never got Trin (selling pressure).  That means that we never got a wash out and capitulation that would move the markets higher.  Those are yet to come...The other thing that saved the market last December if you look at the chart above, was European debt monetization (LTRO), so another round of QE3/LTRO could bounce the market, but each bounce is clearly getting weaker and weaker...