2-19-2018 Comments Recent Rally, Gold

Most people know that I am a longer term trader. The analysis below is the kind of longer-term thinking that I do to support my trading.

Market

These comments reflect on the most recent NASDAQ follow-through day (FTD) with an exploration into the question of whether using historical precedents the FTD is set up for a useful tradeable rally. An FTD occurs when after declining the market turns up (rally day) and then waiting to clear shorts on day four or later the market moves up significantly with volume higher than the day before.

This chart shows the FTD that occurred on 2/14/18, Valentine's day.
[ATTACH=CONFIG]43824[/ATTACH]

Quite noticeable to me is the "V-Shaped" nature of the correction.

Let's compare that FTD with the very successful FTD that occurred in February 2016.
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Notice the extended bottom structure on the second chart. The bottoming process began before the beginning of the chart.

Good bottoms take a while to form. Even the sharp market crash and V-bottom of October 1987 took about six weeks before finally establishing a firm basis for a market rise. The next chart shows that bottom.
[ATTACH=CONFIG]43826[/ATTACH]
On this chart, the green up arrows depict each FTD during the chart period. The red down arrows depict when the market was declared in correction, a cash signal. I used the IBD Market Exposure model to identify these FTDs and market zero portfolio exposure times. There was no Big Picture Column in IBD back then. Notice at the bottom it took a second FTD before the market was ready to go.

There is an indicator that I believe takes in the time factor occurring during a market drop showing when it is likely that an FTD will lead to a tradeable rally. This indicator is called the Coppock curve. StockCharts.com has begun supporting the Coppock as shown in this chart.
[ATTACH=CONFIG]43827[/ATTACH]

Note that this chart is a weekly timeframe chart; this is the proper timeframe to show when evaluating a correction in an ongoing bull market. When trying to identify a bear market bottom, switch to a monthly timeframe. On this chart, both the prior FTD period and the recent FTD period is displayed. The prior FTD is the big bottom in February 2016; an arrow points to a Coppock buy-signal associated with this bottom. A Coppock-buy signal occurs when the curve enters the lower half plane (below zero) and then turns up. On the right side of the chart is the current market rally, the Coppock is nowhere near a buy-signal. There is nothing magic about curves like this. The Coppock curve is a ten period weighted moving average of two Rate of Change indicators, one 11 weeks long and one 14 weeks long. So the indicator incorporates about six months of data with the most recent data weighted higher. Here is the 1987 bottom Coppock curve.
[ATTACH=CONFIG]43828[/ATTACH]

So, what about this data? If I believed we were still in a QE environment, I would doubt my analysis. If I thought that we have returned to more normal conditions, the above analysis would influence my market view. What do you believe?

I own QLD but I could easily move to the sidelines.

Gold

There is some talk about inflation beginning to take hold, and that gold might be working again. I don't know, so let us look at some charts.

This chart captures my central dilemma about identifying the primary trend.
[ATTACH=CONFIG]43829[/ATTACH]

If the primary trend is up, then the most recent pullback from 2010 was a countertrend (correction) with the likelihood that the last period starting in 2016 is a resumption of the primary trend rally.

What if the pullback was a change of primary trend from 2010? In that case, the most recent rally needs to be called a countertrend rally (correction) that will likely be met by a resumption of a primary downtrend. So, let's look a little deeper.

[ATTACH=CONFIG]43830[/ATTACH]

This monthly-timeframe chart shows the recent pullback. On this chart, I identify a possible Head and Shoulders bottom formation. A bottoming H&S pattern looks upside down from an H&S top formation. The structure will be complete if the neckline (dashed line) is broken to the upside. In this event, I will conclude that the primary trend is up and that we might expect a gold rally. It the neckline resistance holds, I will be forced to accept that gold is not ready to rally yet or may still be in a downtrend.

I own GLD

Thanks mike your posts are very helpful please keep them coming .

Excellent post Mike. Thank you. I'm just starting to teach my daughter (29) about stock investing so these kinds of illustrations and write ups help. Plus, very timely.