Skip to content

A bearish charting interpretation of markets

Photo of Jim Berg By Jim Berg

min read

Bubbles always burst and charts have given signals.

“Bubbles – A theory that security prices rise above their true value and will continue to do so until prices go into freefall and the bubble bursts.” - Investopedia

Bubbles always burst.

The dot-com bubble topped on the S&P 500 Index chart in March 2000 and the fall was 50.5 per cent. The tech-heavy NASDAQ 100 Index is also worth noting, as the peak to trough fall was 83.5 per cent.

The credit bubble that resulted in the Global Financial Crisis topped on the S&P 500 Index chart in October 2007 and the fall was 57.7 per cent.

The S&P 500 Index monthly chart below shows the dot-com and credit bubble tops and their subsequent falls. The red arrows on the chart point to the areas where monthly prices had two consecutive closes below the JB Volatility Trailing Stop. These sell signals were the only two times this occurred, after a rising trend, since 1991.

This brings us to the present potential bubble, which many analysts are calling the debt bubble.

Two consecutive closes below the JB Volatility Trailing Stop could signal the top of this rise is in place and the potential for months of falling prices.

The price action has been very erratic. Prices briefly dipped below the trailing stop and are currently back near the highs. This is partly due to the trend analysis as measured by the weekly chart.

There have been four weekly trend reversals in the past year and this has not occurred over the previous 86 years.

S&P 500 monthly chart

S&P500 monthly chart

Source: JB World Indices

The Australian market escaped much of the dot-com bear because of the small number of tech and dot-com companies listed on our exchange. But it’s worth looking at our market through the GFC and the current potential bubble.

The ASX 200 monthly chart below had two consecutive closes below the JB Volatility Trailing Stop and an exit on 3 March 2008 and again on 1 October 2015.

ASX/S&P 200 monthly chart

ASX/S&P 200 monthly chart

Source: JB World Indices

When to go to cash?

The ASX 200 weekly chart below generated a weekly falling trend reversal in June 2015 when prices met my three specific trend criteria. This is the same formation that signalled a move to cash in early January 2008.

ASX/S&P 200 weekly chart

ASX/S&P 200 weekly chart

Source: JB World Indices

The British FTSE 100 Index weekly chart signalled a move to cash when price action generated a weekly falling trend reversal in July 2015.

FTSE Index weekly chart

FTSE weekly chart

Source: JB World Indices

The Hong Kong Hang Seng Index weekly chart signalled a move to cash when price action generated a weekly falling trend reversal in July 2015.

Hang Seng Index weekly chart

Hang Send weekly chart

Source: JB World Indices

The two previous bubbles, dot-com in 2000 and credit in 2008, ended with significant falls. The charts screamed “warning” and were reasonably accurate in signalling a potential bear market.

Dozens of expert analysts comment daily on the increase in debt of individuals, companies and countries.

Debt increases when interest rates are low and countries’ central banks use quantitative easing (a form of monetary policy) to flood the banking system with money in an attempt to stimulate the economy. It can have unintended consequences and distort the value of assets, creating bubbles.

In a crisis and the early stages of a slowing economy, increasing the money supply and cutting interest rates can work, until it doesn’t. Bubbles always burst.

 

About the author

Author and investor Jim Berg has successfully traded and invested in the market for more than 30 years, 18 as a professional adviser. He was one of few educators in the world to warn his members to switch to cash before the GFC and to give them a re-entry signal 18 months later.

Download a free copy of his checklist, ‘7 Pitfalls to Avoid in the Stock Market’Start your 3 Free Video Mini-Course and learn how to confidently trade and invest in the next 12 weeks with Berg’s mentoring-style Report & 12 Bonus E-Classes.

From ASX

The ASX Charting Library provides a wealth of free material for beginners through to advanced chartists.

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

© Copyright 2015 ASX Limited ABN 98 008 624 691. All rights reserved 2015.
Previous Next
Share: