Monday, December 13, 2010

A (bullish) tour around the world

The headlines read Market breaks out to new highs, but how real is this move?

Technicians often look to other indices for confirmation of a trend. So I decided to review both US and international indices to see what the patterns are in those averages. By and large, my trip around the world shows that this bull move does look real.

In the US, the picture is mixed. The broader NYSE Composite is still flirting with resistance.

While small caps have broken out to the upside and appear to be in an uptrend:

Europe looks constructive
In Europe, equities look constructive. The broad STOXX Index seems to be shaking off the bad news. The pattern is a rising wedge, with the average not far from overhead resistance.

The German DAX Index has already broken out and is in an uptrend, which is perhaps reflective of the strength of the German economy:

Cyclically sensitive and resource markets look good
Back when I was at Mother Merrill, we used to watch the South Korean KOSPI closely because Korea was believed to be highly sensitive to global cyclical influences. Here we can see that the KOSPI has broken out to the upside and it's in a well defined uptrend.

The pattern of another cyclically sensitive market looks constructive. The resource-heavy Australian All-Ords looks like the European STOXX: in a rising wedge with overhead resistance ahead.

Here in Canada, which also has a resource tilted market, the TSX has already broken out to the upside and it is in a well defined uptrend:

The R/J CRB Index of commodity prices has already broken out and it's now testing upside resistance:

All in all, these charts other markets show either clearly bullish or constructive patterns.

The technical risks
There are, however, a few risks to the bullish outlook. The elephant in the room is China. The Shanghai Composite has been pulling back, but it is resting on a level of Fibonacci support, which is hopeful for the bulls.

In addition, the Baltic Dry Index, which is an indicator of shipping rates, is weak and near the bottom of its range. This pattern is indicative of possible weakening global trade patterns.

For the time being, markets are very overbought in the face of a tsunami of Fed induced liquidity (see sentiment comments and readings herehere and here). My former Merrill colleague Walter Murphy used to term some conditions as a "good overbought" and the current circumstances seem to fit that criteria. Equities could tactically pull back at any time but I would view any pullback as a buying opportunity.

Looking out over the intermediate term timeframe, both my Inflation-Deflation Timer Model remains bullish on the reflation trade. However, I am watching these last two charts carefully for advance indications of deterioration in the bullish picture.

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