GFC#2 and/or Great Depression#2? - Bearish Divergence TBC
Hi All,
Perhaps a controversial post but will share the idea nevertheless for posterity. This is not meant to be an alarmists post simply a technical analysis with possible graver implications.
Before we get into the TA lets provide some background first.
Black Tuesday 1987. The market crashes 50% from its all time high. It takes 9 years and 1 month to establish a new all time high. Underlying trend line is respected.
Internet bubble bursts in 2002, market recovers by 2004, a 2 year recovery. New all time highs follow. Underlying trend line is respected.
GFC 2008. Market hits all time high in November 2007. Over the course of the next 15 months the market crashes 55%. 11 and a half years later the market has still not fully recovered. Underlying trend line is respected.
GFC 2008 has a few unique market characteristics. We have the longest decline in ASX history. We also have the longest recovery in ASX history (and still going).
I don't think we are going to make new all time highs this time, as our recovery period has been a slow grind like an old man crossing the road. This idea is going to suggest a GFC like market movement as a minimum, with a possibility of a second great depression.
Now the supporting TA;
Bollinger Bands
SHORT TERM VIEW; In the short term we have crossed the middle band and should expect continued upward movement if we look at historicals for the last decade. A break of resistance at 6320 would confirm this. The steepness of the incline is not unprecedented and we should see if it holds in the coming weeks and months.
LONG TERM VIEW; We have a lot more volatility in the market since the GFC. Our BBs deviation values are wider than in previous up trends and also not as smooth or consistent. This would suggest an underlying uncertainty in the market, or a possible market weakness. Many people believe that the underlying issues that caused the first GFC have not been fundamentally addressed and this could be one technical indicator that supports this claim. Over all, this indicator suggest we have an unstable volatile uptrend.
Trading Range
SHORT TERM VIEW; If we see a break of resistance at 6320 we could see the index trading closer to the upper half of the range towards the channel line. Next resistance would be 6567.
LONG TERM VIEW; The market has been consistently within the range for a decade now since the reversal. After 11.5 years we are finally in the zone to consider making a new all time high or at the very least reach previous highs in the interim. Anything within a 3% deviation of 6851 would be considered reaching previous highs. In this case providing us a range of 6645-7056. A clear monthly candlestick finish above 7056 would be considered a new all time high for this analysis. The range is expected to be respected for the next 6 months.
RSI
SHORT TERM VIEW; RSI has bounced off trend line and is also above historical support of 50.6282. There is a slight side ways movement which might suggest some slight stagnation, but I would expect this to bounce off historical support once again at 50.6282.
LONG TERM VIEW; RSI has been quite a consistent indicator for decades. Over sold conditions below 50.6282 have coincided with downward trends of varying degree. Since the reversal in 2009 however we have not witnessed overbought conditions crossing the 67.0930 value. This has acted as strong resistance for the last 11.5 years. If we look at the bull run preceding the GFC you can see that we crossed this resistance numerous times.
This has not occurred, and it would suggest an uncertainty in the market and an overall lack of confidence. A break below the trend line would provide support to this analysis and suggestion of a major trend reversal. At this stage I would say we technically have a very weak bullish divergence although this could be read a number of different ways.
MACD & Histogram
SHORT TERM VIEW; MACD is about to cross into a bullish phase and would suggest continuation of short term upward trend. Histogram has also confirmed weakening of downward phase to reversal.
LONG TERM VIEW; We have a clear bearish divergence forming. Should next resistance be broken at 6320 (1), with MACD and Histogram move into positive (2), and have both MACD & Historgram downward trend lines respected (3), we will have a confirmed bearish divergence. Histogram trend strength has been weakening from first positive since GFC reversal, suggesting overall weakness and lack of confidence in the trend and market itself. Additionally all other historical upward trends have had a consistent/neutral MACD disposition as a minimum, and an upward disposition during stronger upward trends. We have the opposite here, we have a declining MACD disposition since 2014 with a rising index value.
Double Top Pattern Possibilities
If the index reaches a range between 6645-7056 this would be considered reaching previous highs. Failure to exceed 7056 with a whole months candle stick confirmation convincingly would suggest a possible double top pattern with an imminent reversal. I know some might say its difficult to consider a double top over the course of 11.5 years but I believe the other indicators support this point of view and classification as a double top. Ultimately we will be trying to break a previous all time high with a weaker trend, with weaker RSI values and weaker MACD & Histogram indications. I believe the attempt will fail and ultimately signal a major trend reversal, with the overall pattern being synonymous with a double top pattern. In order to qualify as a complete double top pattern we would need to see the low of 3328 broken. This like the bearish divergence remains to be confirmed.
Summary, Classifications, & Timelines
SUMMARY; The above indicators suggest a weakening of the over all trend not just recently but for a number of years. In the short term, the indicators suggest we will break immediate resistance of 6320 and move up to a new market structure. If the current short term monthly trend line is respected, we could see previous all time highs reached between AUG - OCT 2019. However failure for the index to maintain above 6320 or create a new all time high in the months following would be interpreted as support for this analysis. If the immediate trend line is not respected a new analysis would have to be made as to when previous high might be reached and would not entirely invalidate this analysis as a whole. For example if the trend line breaks we could see previous highs reached some time mid 2020 the following downward reversal could still occur from there. Breaking of the trading range trend line and below support of 5666 (an ominous number) would provide strong support and confirmation to a major trend reversal regardless of whether previous high has been reached. This supported with RSI falling below support of 50.6282 and MACD and Histogram moving into bearish territory would provide additional support and confirmation.
CLASSIFICATIONS; Should a major trend reversal occur, a decline and subsequent support and reversal at 4000 would be considered and classified as GFC #2 type event. This would also mean that the Double top pattern has not complete and has been invalidated technically speaking. Should support at 4000 be broken,and Major Trend line also be broken and confirmed, this would be considered a reversal of a 40 year trend and would be and classified as a second Great Depression. We could expect the index to go as low as 2312 and a recovery taking as long as 15 years. A break below 4000 and target of 3328 reached would confirm a double top pattern for this analysis.
TIMELINES; If the trading range is respected previous all time highs must be reached within 5 years, a very conservative estimate. Especially considering that the entire recovery would have taken some 15 years, one of the longest in ASX history. If the current short/mid term trend line is respected we could see a pivot between AUG - DEC 19. At the time of writing this based on available indicator data I believe we will hit the previous high in October of 2019 which will be the final pivot point prior to major trend reversal. There might be a shorter term double top where the high is hit again bouncing from support in the following months etc but generally I don't believe a higher high will be made.
Confirmation
Failure to make and confirm a convincing higher high for a number of months.
Trading range trend line broken.
Support of 5666 broken.
RSI Trend line broken.
MACD crossing into negative value.
Histogram displaying strong downward trend.
Invalidation;
Creation and confirmation of new higher high convincingly for a number of months.
Trading range respected or upper channel broken.
7056 value broken.
RSI breaking above 67.0930.
MACD reversing bearish divergence.
Histogram reversing bearish divergence.
Again, I know it may be taken controversially, but please let me know your thoughts.
Traders-Corner
***
Any trading advice provided has been prepared without taking into account your objectives, financial situation or needs. Before acting on the information provided you should consider the appropriateness of the information, having regard to your objectives, financial situation and needs. You should seek professional personal financial advice before making any financial or investment decisions.
All investment and trade decisions, no matter how well investigated, involve risk.
***
Perhaps a controversial post but will share the idea nevertheless for posterity. This is not meant to be an alarmists post simply a technical analysis with possible graver implications.
Before we get into the TA lets provide some background first.
Black Tuesday 1987. The market crashes 50% from its all time high. It takes 9 years and 1 month to establish a new all time high. Underlying trend line is respected.
Internet bubble bursts in 2002, market recovers by 2004, a 2 year recovery. New all time highs follow. Underlying trend line is respected.
GFC 2008. Market hits all time high in November 2007. Over the course of the next 15 months the market crashes 55%. 11 and a half years later the market has still not fully recovered. Underlying trend line is respected.
GFC 2008 has a few unique market characteristics. We have the longest decline in ASX history. We also have the longest recovery in ASX history (and still going).
I don't think we are going to make new all time highs this time, as our recovery period has been a slow grind like an old man crossing the road. This idea is going to suggest a GFC like market movement as a minimum, with a possibility of a second great depression.
Now the supporting TA;
Bollinger Bands
SHORT TERM VIEW; In the short term we have crossed the middle band and should expect continued upward movement if we look at historicals for the last decade. A break of resistance at 6320 would confirm this. The steepness of the incline is not unprecedented and we should see if it holds in the coming weeks and months.
LONG TERM VIEW; We have a lot more volatility in the market since the GFC. Our BBs deviation values are wider than in previous up trends and also not as smooth or consistent. This would suggest an underlying uncertainty in the market, or a possible market weakness. Many people believe that the underlying issues that caused the first GFC have not been fundamentally addressed and this could be one technical indicator that supports this claim. Over all, this indicator suggest we have an unstable volatile uptrend.
Trading Range
SHORT TERM VIEW; If we see a break of resistance at 6320 we could see the index trading closer to the upper half of the range towards the channel line. Next resistance would be 6567.
LONG TERM VIEW; The market has been consistently within the range for a decade now since the reversal. After 11.5 years we are finally in the zone to consider making a new all time high or at the very least reach previous highs in the interim. Anything within a 3% deviation of 6851 would be considered reaching previous highs. In this case providing us a range of 6645-7056. A clear monthly candlestick finish above 7056 would be considered a new all time high for this analysis. The range is expected to be respected for the next 6 months.
RSI
SHORT TERM VIEW; RSI has bounced off trend line and is also above historical support of 50.6282. There is a slight side ways movement which might suggest some slight stagnation, but I would expect this to bounce off historical support once again at 50.6282.
LONG TERM VIEW; RSI has been quite a consistent indicator for decades. Over sold conditions below 50.6282 have coincided with downward trends of varying degree. Since the reversal in 2009 however we have not witnessed overbought conditions crossing the 67.0930 value. This has acted as strong resistance for the last 11.5 years. If we look at the bull run preceding the GFC you can see that we crossed this resistance numerous times.
MACD & Histogram
SHORT TERM VIEW; MACD is about to cross into a bullish phase and would suggest continuation of short term upward trend. Histogram has also confirmed weakening of downward phase to reversal.
LONG TERM VIEW; We have a clear bearish divergence forming. Should next resistance be broken at 6320 (1), with MACD and Histogram move into positive (2), and have both MACD & Historgram downward trend lines respected (3), we will have a confirmed bearish divergence. Histogram trend strength has been weakening from first positive since GFC reversal, suggesting overall weakness and lack of confidence in the trend and market itself. Additionally all other historical upward trends have had a consistent/neutral MACD disposition as a minimum, and an upward disposition during stronger upward trends. We have the opposite here, we have a declining MACD disposition since 2014 with a rising index value.
Double Top Pattern Possibilities
If the index reaches a range between 6645-7056 this would be considered reaching previous highs. Failure to exceed 7056 with a whole months candle stick confirmation convincingly would suggest a possible double top pattern with an imminent reversal. I know some might say its difficult to consider a double top over the course of 11.5 years but I believe the other indicators support this point of view and classification as a double top. Ultimately we will be trying to break a previous all time high with a weaker trend, with weaker RSI values and weaker MACD & Histogram indications. I believe the attempt will fail and ultimately signal a major trend reversal, with the overall pattern being synonymous with a double top pattern. In order to qualify as a complete double top pattern we would need to see the low of 3328 broken. This like the bearish divergence remains to be confirmed.
Summary, Classifications, & Timelines
SUMMARY; The above indicators suggest a weakening of the over all trend not just recently but for a number of years. In the short term, the indicators suggest we will break immediate resistance of 6320 and move up to a new market structure. If the current short term monthly trend line is respected, we could see previous all time highs reached between AUG - OCT 2019. However failure for the index to maintain above 6320 or create a new all time high in the months following would be interpreted as support for this analysis. If the immediate trend line is not respected a new analysis would have to be made as to when previous high might be reached and would not entirely invalidate this analysis as a whole. For example if the trend line breaks we could see previous highs reached some time mid 2020 the following downward reversal could still occur from there. Breaking of the trading range trend line and below support of 5666 (an ominous number) would provide strong support and confirmation to a major trend reversal regardless of whether previous high has been reached. This supported with RSI falling below support of 50.6282 and MACD and Histogram moving into bearish territory would provide additional support and confirmation.
CLASSIFICATIONS; Should a major trend reversal occur, a decline and subsequent support and reversal at 4000 would be considered and classified as GFC #2 type event. This would also mean that the Double top pattern has not complete and has been invalidated technically speaking. Should support at 4000 be broken,and Major Trend line also be broken and confirmed, this would be considered a reversal of a 40 year trend and would be and classified as a second Great Depression. We could expect the index to go as low as 2312 and a recovery taking as long as 15 years. A break below 4000 and target of 3328 reached would confirm a double top pattern for this analysis.
TIMELINES; If the trading range is respected previous all time highs must be reached within 5 years, a very conservative estimate. Especially considering that the entire recovery would have taken some 15 years, one of the longest in ASX history. If the current short/mid term trend line is respected we could see a pivot between AUG - DEC 19. At the time of writing this based on available indicator data I believe we will hit the previous high in October of 2019 which will be the final pivot point prior to major trend reversal. There might be a shorter term double top where the high is hit again bouncing from support in the following months etc but generally I don't believe a higher high will be made.
Confirmation
Failure to make and confirm a convincing higher high for a number of months.
Trading range trend line broken.
Support of 5666 broken.
RSI Trend line broken.
MACD crossing into negative value.
Histogram displaying strong downward trend.
Invalidation;
Creation and confirmation of new higher high convincingly for a number of months.
Trading range respected or upper channel broken.
7056 value broken.
RSI breaking above 67.0930.
MACD reversing bearish divergence.
Histogram reversing bearish divergence.
Again, I know it may be taken controversially, but please let me know your thoughts.
Traders-Corner
***
Any trading advice provided has been prepared without taking into account your objectives, financial situation or needs. Before acting on the information provided you should consider the appropriateness of the information, having regard to your objectives, financial situation and needs. You should seek professional personal financial advice before making any financial or investment decisions.
All investment and trade decisions, no matter how well investigated, involve risk.
***
Comment:
A few months have passed and we can see are still on an upward trajectory. RSI has breached 67 and MACD and Histogram are looking quite eager. At this stage I think its best to check in a few months again.
Comment:
This analysis has aged well so far. We look as though we are coming back up for a retest of either 5666 or up to 5800.
Corona? Uh, nah.
Corona? Uh, nah.