Shanghai index creates historic reversal pattern like 2007

shnaghaireversalpatternatresistancejuly1CLICK ON CHART TO ENLARGE

Much of the attention around the world seems to be revolving around a small country called Greece. What about the most populated country in the world (China), any key messages coming from there of late?

Well another Month, Quarter and Half a year are in the books. With this in mind I wanted to look at Monthly action of the hottest stock market in the world, the Shanghai Index. Above looks at the Shanghai index over the past 25-years. The 100%+ rally over the past year has pushed the Shanghai index up to its 23% Fibonacci ratio and a long-term resistance line, that has been in play for 25-years at (1) above.

As the Shanghai index was hitting this dual resistance last month it created a large reversal pattern. Could a reversal pattern after a large rally become important? Below looks at large reversals after at least 100% rallies in a year.

shaghaibearishreversalafter100rallyjuly1CLICK ON CHART TO ENLARGE

As you can see, seldom has the Shanghai index created a 10% reversal pattern after a 100% rally in 12-months. Until this past month, only one time in the past 25-years has the index created at least a 10% reversal pattern after a 100% rally in 12-months, which was 2007. A large decline followed this reversal pattern back in 2007. For sure we don’t have a large number of samples to compare what took place last month. One should not lose sight of how rare last months action was and what its long-term message/implications could be!

No doubt the world believes what happens in Greece is important for global stock markets.  I am a fan of leadership, more so than being concerned about lagging stock markets or countries.

What the Shanghai index does going forward at (1) in the chart above (25-year resistance and Fib 23% level) should end up being very important for stock markets around the world in the next 6-months!

A break above dual resistance at (1) after this rare reversal pattern would be bullish for this global leader, lets see if it can accomplish it going forward!

 

Junk bonds diverging, could send bearish message to stocks!

junkbondpimcotestingsupportjune30CLICK ON CHART TO ENLARGE

This charts takes a 25-year look at the Pimco High Yield mutual fund. In 1999 & 2007 the fund was diverging against the S&P 500 and once it broke support the fund and broad markets turned weak together.

At this time PHDAX is now testing 4-year support and it has been diverging against S&P for almost a year!

Below looks at the two most popular junk bond ETF’s against the S&P 500

performancejunkspy1yearjune30CLICK ON CHART TO ENLARGE

This chart reflects that JNK & HYG are diverging against the S&P 500 over the past year, by almost 10%!  In the past, junk bond divergences sometimes were a caution signal for the future of stock prices. Will it be different this time?

With the S&P nearly flat on the year, one might want to keep a close eye on the junk bond complex to give you and idea of where the S&P 500 could be at year end!

 

If you would like to stay abreast of the messages from the Junk Bond complex, you might be interested in our Shoe Box/High Yield weekly research report.

Click below for Shoe Box/High Yield report details

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King Dollar could be creating unhealthy bearish pattern!

dollarformingbearishdescendingtrianglepatternjune29CLICK ON CHART TO ENLARGE

The current news addiction of late revolves around Greece, closely followed by how the Euro will react this situation.

Taking a step back from the Greece noise, I wanted to take a look at the price action of the US$ over the past few months.

The US$ looks to have broken support and kissed the underside of old support as new resistance at (1), creating a third lower high. These lower highs could be the top of a bearish descending triangle pattern. (See Descending Pattern below)

descending triangle pattern

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Over night the US$ was strong for a while and the Euro was weak, yet a small reversal pattern might have taken place at (2).

From a 30,000 foot view, if the US$ is forming a bearish descending triangle pattern and support breaks at the 93 level, the measure move suggest the US$ declines to at least the 87 level.

With all the uneasy news coming out of Europe and Greece, is it really possible that the US$ could start acting unhealthy and turn lower and the Euro actually start acting stronger?

These patterns are made from billions of free thinking people…stay tuned to see what they do, because what the US$ does at falling resistance, could send a key message for how all of us should construct portfolios going forward!