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stock market patterns - analysis chart
So Was 2015 a year of consolidation, or worse, distribution ?
source : marketwatch
Now that the Federal Reserve has finally raised interest rates, what can we look forward to for the remainder of 2015 and on into 2016? Will a year of "stuck in neutral" turn out to be a consolidation phase — a period where the market rests up before lurching higher — or will it instead eventually be seen as distribution, a period where the so called smart money ends up having sold the bulk of their inventory to the dumb money? The answer to that question means a great deal about what you or I might do in 2016 and the answer is intimately tied to how future economic data is likely to be viewed.
If we look back at 2016, the world economic data left a lot to be desired. With slowing growth rates in most of the world, the United States has been seen as the promised torch holder for the coming year. Unless the U.S. can continue to grow despite all the overseas headwinds, so the thinking goes, then the world is likely to face another global recession in the not-to-distant future.
By raising rates, the Fed has told us that the economy is able to start to stand on its own. They have also implicitly said that if it gets stronger then they will act to raise rates farther and that's what they expect to happen.
So, given this data, what conclusions can we draw? First, if data is a lot weaker than expected, then the Fed is going to be seen as not having a good handle on what is really happening. Fed credibility will suffer as a result, and that will not be good for the markets.
Secondly, if data starts to be of the barn-burner type, then the fears of more aggressive rate hikes are going to begin to litter the landscape. That, too, will not be market friendly.
The likely result of these two scenarios is so very different than what we have had for the past six years where all news was good news. If the economy was bad, no problem, the Fed has our back and they will keep push money out. If the economy was good, then that was great, too, since it meant that what the Fed was doing was working.
Contrast that with the scenario that is about to develop where the economic data points need to be not too hot and not too cold in order to exude confidence. A very different picture that holds a very different set of outcomes. That's the environment we are likely moving to.
With only a few weeks left in 2015, the stock market did recover well from the WORRIES over in CHINA mid year. You can see the market crashed 300 points rather fast, and then recovered the several weeks after. See the chart below marked V BOTTOM [below]
|stock market patterns - "V" Pattern|
As for the broader question of consolidation vs. distribution, note that the patterns typically look about the same when examining longer-term charts. Most technicians would say that dissipating volume during the sideways period is the signal that it is distribution vs. consolidation, but I'm not so sure that is true all the time.
Here's a current picture of the S&P 500 on a weekly time frame. There are two price points that appear reasonably critical to answering the distribution vs. consolidation question. If this is just consolidation, then the line in the sand is around 2103. That, on a weekly basis, is the breakdown bar and if you want to short this market or take off more inventory, then that is the price area where you want to do it.
You can see the the last few weeks, the market has been all over the place, and basically going sideways, but in technical analysis terms, this could be referenced or be similar to what is normally termed a BULL FLAG!? You can see it drawn on the chart below.
Although scaling that area and holding over it for a couple bars (two weeks) would not guarantee higher prices to come, it would certainly tilt the odds heavily into that camp. That would say this looks to be more like consolidation rather than distribution. As the chart clearly shows above.
The confirmation of distribution won't happen until the lower of the two range is broken. That is, of course, a long way down from the present price point.
If you consider other evidence you also get a mixed picture. Most of Asia is suffering through bear markets already. Commodities are in the midst of long and ingrained bear markets and even European markets — despite a huge currency depreciation — remain mired well below their highs from less than a year ago. All of this supports the notion that this is distribution.
Thus, the end result is a mixed picture and until further evidence is offered up, one has to remain cautiously bullish but with reduced exposure. That is what I have preached all year long and is what you should be doing. If you aren't, you really should reassess your stance. Let the markets drive your exposure levels — not what you think the market might do on any given day.
Yes, we did warn that there could be some sort of santa rally!, but the Quadruple witching last week, really played havoc with the markets. You can see that even though we had troubles in CHINA, that stock market is still in a sideways pattern for the whole of 2015. Its throw many traders off, and all the rest probably are sitting on the sidelines not knowing what to do!
In the real world, its not really that easy to guess what the market is going to do next, however what we can say is that if you look back over the last 100 - 200 years of data on the S&P or the other indices charts, normally when you have a sideways year in a bull market, it basically means the market is gathering steam or slowly building up kinetic energy for a RALLY or UP year!. We are not saying next year 2016, is going to be an explosive RALLY YEAR from JAN to DECEMBER, however 2015 felt like a year we had before 2013, when double digit returns came to the market. So we could be in on of those situations again, time will tell. We will urge to keep you updates either way. There are lots of opportunities coming in new vehicles too next year in 2016, and the stock exchange itself has many changes.
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