Fortune telling charts, revisited

Historically, for those reading this blog over the years, it is obvious that I have an opinion that the stock market and financial markets are not stable, and will not be stable until several things come to pass. Among them, return to accounting practices in place from the great depression through 2008, diligently enforce existing laws, and gain control over US debt issues.

Unfortunately, these items get harder to face the more America and the world avoids core problems.

With that backdrop of a negative view, it isn't a far leap for me to dig back into this blog to find some post to foretell a market decline is to ensue.

However, there is one post that very much sticks out to me, using charting to "indicate market turning points". Back on June 6th, 2011, I posted an entry using charts foretelling of the return of a down market. The post was titled "This week in fortunetelling charts".

What makes this post different than other negative posts is it focused on using chart trend lines to indicate a turning point to watch. On that date, the markets crossed this threshold. I suggest you read the post. This indicator seems to be one of the earliest of all the indicators I have looked at. The biggest indicator to me is documented on the post "When to buy stocks or get out of the market". That indicator to me is the ultimate indicator, one that I believe may cross in the next four weeks.

Below is an update of the Fortune telling chart I posted on June 6th, in hindsight, as dead on as could be asked. Look at the full post for historical comparisons.

At this point I am looking for a market bounce to lighten up on some stocks, one which I can only hope that comes. S&P 500 @ 1250 at this point would be a welcome gift.

From WebSufinMurfs FinancialBlog2

This Week in fortune telling charts

What is the point of looking at stock charts?

There are some charting religions out there including Elliot Wave Theory, Cycle Theory, and I am sure a dozen more. I have come to realize I don't believe in Elliot for fortune telling, and Cycle works, mostly, and nothing works all the time.

What I try to look for is a large running trend, and form a trend line to use as a "signal" that the trend is probably changing. This of course, does not always work, but you need an indicator to keep you focused on what side of the market seems best.

So today I investigated the S & P 500 (SPX) market trend from 1994-2003, 2001-2009, 2009 to t0day. I went back and drew trend lines to see how accurate this fortune telling method is.

In addition, I created two types of charts for each period in time, one is linear, meaning normal charts you always see. Each value is equally positioned to the next value, like graph paper.

The problem with this type of charting is it doesn't indicate PERCENTAGE relativity to each value. For example, 500 to 600 is a 20% gain, but 2000 to 2100 is 5% gain. The lower the value, the more each change is a greater percent of overall value change.

To graph this, you use Logarithmic graphing, where the distance between values on the low end are farther apart, but as the values go up, the distance between lines is closer.

This shows the MAGNITUDE of change relative to value, a much better indicator of percentage change.

The goal of this exercise was two fold for myself.

1) Does large scale trend charting indicate anything worth while?

2) What methodology historically has been best indicator when a trend has changed?

In the charts below, the green line is the overall long term trend line.

The blue line is a secondary trend line that can be drawn in a shorter timeframe, typically as a bubble accelerates before bursting.

Short summary for each group, then at bottom a summary.

1994-2003 - Log then linear

Logarithmic clearly gave better warning than linear for long trend, basically a tie for shorter trend line (blue line).

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

2001-2009 , log then linear

The logarithmic clearly gave better warnings in the long term trend (green line) and about same as linear for shorter term trend (blue line).

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

2008 - 6-5-2011 - log then linear

The jury is out of course where the market heads from here. I couldn't find a decent "short trend line", which is disturbing, maybe a bubble acceleration is yet to come?

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

Conclusion

In the long term trend line perspective, the last 20 years, with the last two major market bubble bursting, the logarithmic chart was a much better warning to sell out of the markets ASAP then linear. Unfortunately, two data points does not prove much. And I don't have the time and energy to go back to the last 8 market declines to get a better trend pattern.

But one thing IS for certain, this past week, using logarithmic charting, we have a warning shot, the trend may be changing. And when a trend changes, it tends to lead to significant declines by recent market standards (1994-today).

One other indicator is the long term trend signal that has been extremely accurate for long term investing for the last 50 years. You can read more about this method here. Although this indicator hasn't tripped yet, it does seem to be starting to curl into that direction. (click here for latest chart)

UPDATE 8-10-11: Fortune Telling Stocks, Revisited

Corrective Rally over?

I have blogged quite a bit that I am watching "chartists" on market direction. To me this is a critical test, if the chartists are correct SPX will NOT see a value of 1,150, and the decline will resume. If this test fails, I may give up on chartists completely.

Gary of the Smart Money Tracker not only likes gold, while but thinks the SPX goes much higher. I did put my toe in for gold, but no way in heck I am going long general stock market here. 72% rally in 10 months is impressive, a 117% rally in about 15 month is possible (anything is), but I can't do it.

The chartists seem to believe the "rebound" is about over, and the "catastrophic wave c" should resume.

I guess we'll know within a month who was right.