The Hibernating Wedge: Illusions of a Feigning Bull
By Joshua Enomoto, Founder of ContangoDown.com and FutureMoneyTrends.com contributor
On the Nov 24th edition of CNN’s “Your Money,” host Ali Velshi stated that based on positive trending economic metrics, we may usher in a “new renaissance” of sustained growth. Clearly, the positive reaction of the markets during Black Friday has put many people in an optimistic mood, but a new renaissance? What am I missing here? While Congress will likely find a resolution to the fiscal cliff prior to the Dec 31st deadline, the underlying causation of the initial economic crisis has never been resolved.
For years, our government has merely kicked the dirt underneath the rug, but we face a point now where even the rug is no longer big enough to conceal the gravity of this mess. I warned through CrustTheStreet.com’s latest video that a stock market collapse will occur when people are least concerned about the economy. I stated that “mainstream media pundits (will) talk excitedly about a new era of prosperity as the Dow Jones continues to retrace new highs after new high.” Little did I know that this optimism would come only a day later, especially from a highly esteemed source like CNN. But what many investors are not aware of is that this renaissance is a bear trap.
Let me be very clear: the Dow Jones Industrial Average will continue to rise, along with other major indexes, but it will crash at a time when people are least expecting it. It is of critical importance that you move assets away from the equities sector before this cataclysmic drop!
Let’s review the technicals for the Dow Jones, where I incorporate predictive assumptions into the analysis:
The main takeaway from the above chart is the rising bearish wedge, an ominous technical indicator which suggests that the bulls are incrementally making gains in a slowly constricting market. At the tail end of the wedge, the market has constricted to the point where no more growth is possible and that the bulls have expended their last morsel of energy. As such, the ever-present mistress of gravity awaits to consolidate prior gains. For the Dow’s case, because our esteemed government officials decided to artificially prop up the economy rather than face the discordant music of the 2008 collapse, the downward slide can very much overshoot before it reverts back to the mean. In nominal terms, we can easily see Dow 7,000 or lower before we get back to an “equilibrium” point, somewhere around 10,000 points.
Baloney, you say? Consider this 5-year chart for the Dow:
Most of you are probably familiar with the “double top” formation: this is a bearish phenomenon where a second spike high is nominally just shy of attaining the level of a first spike high. For the Dow Jones, the first spike high occurred on October 9th, 2007, where it hit 14,169 points. According to ContangoDown.com’s predictive model analysis, the Dow will hit 14,150 points sometime during the beginning of December 2013. I firmly believe that investors will only have one year before a major downturn wipes out stock market valuations across the board! Just consider the extraordinary coincidence here: the Dow is charting a major bearish wedge pattern superimposed upon a macro-level double top formation. Even if you think I’m totally nuts, you cannot ignore this development!
Please consider the S&P500, which prominently shows a bearish wedge in development:
The wedge of the S&P500 is climbing at a steeper angle, perhaps suggesting a more precipitous move down when economic metrics start hitting the proverbial fan. To be fair, if this pattern were to play out logically, it portends a collapse towards the end of December 2013, or perhaps in the beginning of 2014. Regardless, the timing is too close to the predicted Dow Jones collapse to be “just” coincidence.
And if you think I’m just being bearish on this side of the Atlantic, think again! There are other nations’ stock markets that also exhibit long-term bearish harbingers.
Consider Great Britain’s FTSE index (colloquially pronounced “footsie”):
While not postured in a rising trajectory, I consider the British wedge to be just as bearish as the American wedge. For starters, in order for a wedge pattern to be considered bullish, both the top and bottom range of the triangular pattern needs to decline. This suggests that the bulls are taking a breather and collecting themselves before their next leg up. In a bearish wedge, the psychology of the price action from the bulls is one of desperation: an ever-futile effort to move forward in a constricting market.
While this statement will not appear in any economics text book, the FTSE looks bearish. And since there are no fundamental indicators to suggest a major pop upwards in the British economy, I am convinced that the FTSE will follow the Dow Jones into investment purgatory (please note that I said “purgatory” and not “hell,” as I also firmly believe that we will have a future going forward and this is not a call to doomsday prep).
So, you might be thinking…is there anything I can do to avoid this disaster?
No. The rain will fall on both the righteous and the unrighteous, and there’s nothing we can do individually to avoid a macro-level catastrophe in waiting. Jobs will be lost, social order will be in disarray, the smell of panic and fear will be very apparent.
However, there are ways to hedge ourselves financially. Over the years, I have discussed at great length the benefits of precious metal ownership and I will continue to remain consistent in this sector. Savvy investors and concerned citizens alike must have some diversity away from fiat currencies and into hard assets. But there’s also an opportunity here: one man’s bull market is another man’s bear market.
It is thought that the term “bear market” arose from the days of the bear skin trader, who because of great demand would forward sell products he did not yet have in inventory: the strategy was, if the cost of goods declined, an immediate profit could be realized due to the fact that the forward sold products would already be priced in at a higher rate. For the bear skin trader, lower prices were a good thing!
This is the mindset you will need to fully appreciate my next statement: Japan will enter a bull market!
Let’s take a look at the Nikkei Index:
Interestingly, while Western stock markets are positioned for a long-term bearish move, the opposite is true for Japan’s Nikkei Index, where it is charting a bullish pennant formation. In fact, this bullishness could already be happening as you read this, as last week’s price action formed a gap up from the prior week. This may suggest that the bulls are true believers and will continue to form massive support for a major move upward.
Fundamentally, the Japanese Yen is experiencing its own paradigm shift, where a long-term bearish head-and-shoulders formation is signaling that a Yen above the 130 level can no longer be sustained. This may usher in a new era of devaluation of the Japanese currency, which would be a God-send for the export driven nation. Politically, the man likely to be the next prime minister, Shinzo Abe, has been a consistent monetary dove. His party agenda is to “print, baby, print” and the Nikkei will be the beneficiary of such a proposition.
Understandably, there will be many that will be put off by the above findings. After all, who wants to hear bad news? Unfortunately, technical indicators are confirming what the fundamentals have been screaming about over recent years and it is high time we pay attention! However, a bull market is nothing more than an inverse bear market and finding the right opportunities will profit us handsomely, regardless of whatever else is going on in the financial world. Therefore, as we ring in the New Year, consider investing in precious metals, strong Japanese companies, inverse positions in the Yen, and shorting the US equities market.
