Trapped

By: Erik Swarts | Mon, Nov 21, 2011
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"Everything is both simpler than we can imagine, and more complicated that we can conceive." - Johann Wolfgang von Goethe

Never a more perfect quote was written to epitomize what charts illustrate for me and the markets they describe. Every now and again, the pieces of the puzzle arrange themselves in such a way that the pure simplicity of the chart speaks volumes about the complicated and entangled system it represents.

It just makes sense.

For the last 10 years the respective global equity bourses have traded in an ascending triangle/wedge formation. In essence, trading between the major market inflection points of October 2002, October 2007, March 2009, and just recently - April 2011.

And while the last pivot is equally important as a major market inflection point, it is certainly more discrete - predominantly because it was not a new all-time high and still appears in the rear view mirror.

At the end of April I had a brief chart (Bull-Trap) that described the yet to be fulfilled bull-trap as it was first breaching resistance. In light of the previous note on Spain, I thought it would be compelling to show the same time period with several different markets. The trap is rather evident on all of the respective charts.

Spain EWP

Japan EWJ

Germany EWG

Italy EWI

As evident in our own long-term chart, the extreme market stresses during the fall of 2008 did not arrest the declines at the respective trendlines that served as support for other equity markets. We could very likely see Germany have a similar cascade if the crisis moves to a disorderly climax.

U.S. SPX

The following two charts present what I perceive to be significant vulnerabilities to the deflating commodity trade that have been in place since 2002.

Canada EWC

Australia EWA

As I illustrated earlier in the year (see Here), the CRB index hit its 61.8% fibonacci retracement level in the Spring and has bounced through its respective underlying supports at 50% and 38.2%. Should the weakness continue to persist, as I believe it will - the index will find itself in a relative technical no-man's land on its way back to the 2009 low.

CRB Index

This will likely be reinforced by the secular sea-change that is taking place in the currency markets as the dollar continues to strengthen after establishing a long-term low. The sum of this will inevitably become headwinds towards the respective markets that have disproportionally benefited from a weaker U.S. dollar and the "endless" bid, that up until recently - been in place across the commodity sector.

US Dollar Index

 


 

Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

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austrian-money-supply/