Market bottom: Are we there yet?

THERE is nothing more annoying than driving to Kuala Lumpur when – just past the checkpoint and with Johor Bahru still in the rear view mirror – the children ask: “Are we there yet?”

It’s also a familiar chorus from investors waiting for a falling market to bottom.

For some investors, it’s a cry of desperation because they have held on and want to know when the slaughter will stop. For others, it’s a cry of opportunity because they sold early and have cash waiting to get back into the market.

A month on, it’s a good time to revisit the chart analysis of the S&P.

The spectre of rising inflation, cost of living pressures and rising interest rates will not disappear soon. These impacts cascade through the economy and undermine the performance of listed companies. This growing sense of doom is reflected in the head and shoulder reversal pattern where rising confidence is sapped by yet more bad economic news.

The combination of A, B and C created a head and shoulder reversal pattern on the weekly chart. The neckline of this pattern is shown with line D. The pattern is confirmed when the index retreats from the right shoulder and value moves below line D. This has developed.

The pattern also sets a downside target near 3,650. The index fell to 3,800 and then staged a new rally. This raises two important points – important because these points can invigorate or destroy your investment portfolio.

A warning: This gets a little technical.

A sustained move above trend line D signals a recovery from the head and shoulder pattern. That would mean that the market will not retreat and continue to fall towards the 3,650 target. If this is the case, then investors will resume buying.

However, starting in 2008, the head and shoulder patterns have developed a twin right hand shoulder pattern. This is another rally above the neckline – line D – to make a new peak lower than the peak of the right shoulder – point C.

Then, the market falls and achieves the original lower target set by the head and shoulder pattern.

If this develops then any entry made after the break above trend line D is a short term rally opportunity and not the beginning of a long term uptrend. Investors need to apply caution.

Our assessment is that this is a repeat of the 2008-style recovery with a false breakout rally followed by a resumption of the market collapse towards the 3650 target level.

One of the predictable features of the market is the way unseen opportunities or threats appear to suddenly emerge and investors realise they missed the start of the well developed opportunity. China falls into this category. It has been a dismal market for almost 6 months and the retreat of investors has cascaded into a prolonged market fall. The cry of “Are we there yet?” has been loud and long.

A great deal of the fall has been caused by the severe lockdown policies that bought industry to its knees as logistic chains simply stopped working.

We probably won’t see a rapid about-face in the Covid policy, but China has made decisions in other areas to feed a financial and economic recovery.

The first decision relates to exchange traded funds (ETFs) and the second relates to the bond market. Both decisions further open the market to foreign investment and improve market liquidity.

China’s economic management did not stumble in 2008 and it’s unlikely to stumble now.

It will be easy to look back in a few months’ time and regret not seeing the developing opportunity that is now emerging on the chart of the Shanghai Index. There are significant resistance barriers to overcome but they are not insurmountable.

The key change in the Shanghai Index chart is the confirmation of the uptrend line. This is confirmed with more than 3 anchor points.

The second point of interest is the intersection of the new uptrend line with the long term downtrend line. This shows the clash of two strong, and opposing forces.

This intersection point is also very near to the value of the historical support and resistance level near 3,220. This is the third important feature on the chart.

This brings together 3 powerful market features. A break above these features is very bullish because it shows the market has overcome significant resistance. Failure to continue the uptrend is very bearish because it shows that resistance remains the dominant feature of the market.

The Shanghai Index has a history of sharp moves and this critical intersection point sets the scene for another.

The current uptrend has delivered a 12 per cent gain and it has the potential for another 12 per cent plus.

With both the S&P 500 and the Shanghai Index, we are not quite there yet. But we are getting close, and investors need to adjust their strategies accordingly.

The writer is a financial technical analysis specialist, an equity and derivatives trader, and an author. He has developed several leading technical indicators used by investors in many markets.