What bull trap?

Evening traders/investors,

I have 2 charts to show you all today. The recent strong, upward move in equities took me by surprise. So, I decided to step back and re-look at the picture painted on charts.

I will start with the STI. First off, take note of the massive head and shoulders pattern I have been having on the STI’s chart. Over the last few months, I leaned on the bearish side since the head and shoulders is traditionally a bearish pattern. Try as I might, the STI recovered from lows at 2700 and blasted past 3000. My stubborn nature is telling me there is still a chance the STI will fall back below 3000, and the upward breakout will then be rendered false. Strictly, I have no choice but to see the recent surge as the STI climbing above critical resistance at the 3000 region. This means that I have to expect further upside. 3100 becomes the nearest upside target, and I think 3150 should not be a problem even.

This is where the confusion comes in. If you refer to my last post on the STI, I uploaded a chart of several indicators. Indicators tell me of “dangerous divergences” between price and indicators; and these indications are the most accurate signals from indicators.

Most sensibly, I have to interpret this as near-term profit-taking before more buying pressure. The key event in the chart below is that STI’s closes for the last trading week have been clearly above 3000.

Next up, I have the S&P 500.

S&P 500 was rangebound at the 1300 region before the onset of the massive sell-off in August last year. Just when fears of a bear market down to 2008/2009 lows were strong, the market, as usual, flew skyward – even past the post-crash highs to hit 1400. Reading the previous sentence, what this gives us is 3 regions of price; and by now we should identify this as an inverted head and shoulders. This time around, I favour the upside since the US stock market is basically on a multi-year bull run. For double-dip preachers, a chart spanning more than 3 years with price going up in, practically, one diagonal line, equates to a multi-year bull run. Just considering this alone, I have no choice but to strongly consider my mid-term bearish view on equities. The sell-off in May was scary; especially so for short-term traders. But, the equally quick rebound cannot be ignored. The bullish sentiment is making a bull out of my 2-month old bear! Last but not least, bulls can rejoice over the upswing in the 200-day MA.

Looking back at my last few posts on longer-term takes, I realise my analysis is sometimes clouded too heavily by sentiment. The good thing is that I am staying nimble, and looking to profit whichever way the market decides to go. The problem with “staying nimble” is that I will be susceptible to wild, volatile, irrational swings and whipsaws (and we know markets are like that). This is the conundrum I have been facing over the last few months when looking at charts. Just when I have formed an opinion on the markets based on technical analysis, out pops up an exact opposite chart event that confuses my case – something like the meaning of paradox.

Maybe, just maybe, I need to refine my chart-reading skills. In every skill-based field, there will be times when the practitioner has overcome a hump in the learning curve and has reached a plateau. For a while, the practitioner tastes success from applying whatever skills acquired recently. But, in due time, the practitoner will feel lost; and this is also probably the time for an upgrade.

Till then, I can only put this post up and look back to see how future events will change the picture of the charts I posted above.

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

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