How Best to tell if Market has really Bottomed?

18 August 2022

Jump to 

This is presently the most pressing question that many would want an answer to.  Some chartists speculated that the present US market trend is just like in 2008 when the market is expected to undergo another downtrend or drop before it can recover.  

Some went as far back to draw charts and superimpose the charts of 1937,  2000, 2008, and 2022 to prove their points.  This article will show how the market has really bottomed and if we should enter the market now.

When will Market Bottom?

The market often considered to have bottomed when there are more than 80% of the stocks hit their 200MA as predicted earlier on 26 July 2022

What if This Happens Again?

The market may cause a secondary bottom and collapse again like it had happened on September 15,  2008, when Lehman Brothers went bankrupt.  On that very day,  the Dow Jones Industrial Average had lost 4.5%,  the largest since the  911 Terrorist attack on the Twin Towers in New York on September 11, 2001. 

How to Tell if such a thing will happen again?

To know how to tell, please click the "Reveal" button to see the next chart. 

This chart shows that there were 2 events that caused the market failures and did not recover after the market stock hit the 200MA baseline. These 2 events are: 

  

a)  Lehman Brother Event (Marked Event 1 in the Chart)

Before the Lehman Brothers event,  the market was running on another track in 2007 as shown.  The stocks hit the 200MA around March 2008 & recovered.  When Lehman Brothers declared bankruptcy on September 15, 2008,  the market hit the 200MA again.  This time,  it went really down under, changing also its course to run on a new track as shown.

b)  The Covid 19 (Marked Event 2  in the chart)

This event started by Fed's QT in 2018/19.  The market recovered after stocks hit the 200MA in 2019 but it was soon spooked by the Covid19 break out in China.   The secondary bottom appeared only after the US Government started up the 3 Trillion USD Covid Stimulus packages in March 2020.

In Conclusion

If there is a similar happening like Lehman Brothers appears this time,  it is likely to do exactly the same.  It will run down and break the red trend line as shown before recovering.  It might also run on an entirely different track like 2008/09 if the secondary bottom were to be as bad as the Lehman Brothers event.

Disclaimer:  This article is for information and educational purposes.   Readers are advised to conduct their own research and study to make their own investment decisions. 

Stock Market of China, Taiwan, Hong Kong and the US in One Chart

30 July 2022

This article is making an attempt to find how the various stock markets in China,  Taiwan,  Hong Kong, and the US interacted with each other after Mr. Xi JinPing became the President of the People's Republic of China (PRC) in March 2013.  

For clarity,  this article compares the main indexes of the 4 markets all in one single chart.

What Chart?

This chart was drawn using the performance chart inside stockchart.com. 

The chart started by saying Mr,  Xi Jin Ping took office in March 2013.  He succeeded Mr. Hu JinTao,  becoming the 7th President of PRC.

The Achievement of Mr. Xi JinPing

Xi is well known for his anti-corruption practice and the one Belt One Road(OBOR) initiative. Economically, the PRC people see him as a successful President who is behind China's export-driven growth.  Xi's achievement must be the reason behind the super growth of the Chinese stock market in mid-2014.

The Chinese Stock Market Bubble in 2015/16

During Xi's term in 2014, the Chinese Yuan or RMB became one of the world's top five payment currencies, overtaking the Canadian dollar and the Australian dollar.  

The Chinese traders/investors could have seen it as an opportunity to make some quick money.  They were reported to often use borrowed money to buy stock.  This unfortunately caused China's stock market bubble to burst on 12 June 2015.  

The Chinese stock market bubble eventually ended around February 2016.  The Chinese markets have not quite recovered since.

The Hong Kong Stock Market

While the Chinese markets were flourishing to form the bubble,   the Hong Kong market remained quite steady, trailing behind the rest of the stock market until the Hong Kong Street Protest broke out in March 2019.  

The Hong Kong market dropped about 35% during the Hong Kong Street Protest but gained back about 25% after the introduction of the Basic Security Law on 30 June 2020.  But this gain was quickly erased when the Hong Kong Exodus started after the UK government introduced a new visa scheme for holders of the British National (Overseas) passport.

The Taiwan Stock Market

As shown in the chart,   the Taiwan stock market had a better time compared to Shanghai and Hong Kong markets.  It appears to trace closely behind the US market after 2020.

The Danger of Margin Trades

8 August 2018

Jump to 

1) Update: 12 August 2018  CFD,  a form of Margin Trade
2) Update: 10 December 2021  Margin Trade today
3) Update: 13, 15 & 17 December 2021  Interest hikes
4) Update: 19 December 2021  Interest rate vs Margin Debts
5) Update: 18 July 2022   The Possible Next Market Move 

Other Relevant Articles

Use McClellan Summation Index to improve trading skills? 

What is Margin Trade?

Simply put,  it is a trade that one borrows money from brokers or bankers to buy stock in the stock market or a currency in a Forex Exchange.  Here is an explanation video

So What is the Danger?

Actually,  there is nothing dangerous about Margin Trading.   It is just a financial tool that investors can use as leverage to buy more stocks or currencies.

There is a danger only when the investors become very greedy,  starting to trade margins above their means,  borrowing more and more margin until they cannot pay up when the brokers or bankers initiate a "margin call".

What is a Margin Call?

A margin call happens when a broker demands that an investor deposits more money or securities so that the margin account is brought up to the minimum maintenance margin. A margin call often happens when there is a market crash and the account value falls below the broker's required minimum value.
When there is a margin call,  the investors are often given little time to do the "top-ups".   In the event that the investor cannot top up the account within the stipulated time,  his brokers or bankers will have to right to dump all his stocks or currencies in the market at ridiculously low prices to recover their losses.

Why do I have to worry?

Rightly, one need not worry much if one does not “play” margin trades;  however, one would have to worry when the margin trades in the market are running out of every proportion with a possible risk of causing a market failure.  This is when margin debts will be so high to cause en-masse margin calls that will cause markets to collapse.

Can Give Example?

1.  The SGX’s Penny Stock Market Crash in 2014

A Malaysian businessman and his partners manipulated the market and caused the price of 3 Nos of SGX’s penny stocks;  namely,   Blumont Group, LionGold Corp, and Asiasons Capital,  to surge by more than 800 per cent in less than 9 months in 2014.   A Singaporean trader by the name of  Quah Su Ling took up a margin loan of a very big amount from Goldman Sash London.  When the price of the 3 penny stocks fell on Oct 2,  2014,  Goldman Sash demanded  Quah to top up $48 million in her margin account within one and half hours and started selling her stocks.  Over the next 2 days,  $7 billion were wiped off from the 3 SGX’s penny stocks.  Blumont and Asiasons’s share prices dropped from a peak of S$2.0 to less than 1.0 cents in weeks.   This caused the SGX's penny stock market to crash.  The details are covered here

2.    Stock Market Crash of 1929 - Buying on Margin

It was speculated that Margin trades were partly responsible for the stock market crash of 1929.

What’s the Present Situation?

The following chart prepared by “Dishort.com/Advisor Perspectives” illustrated what is the present situation of Margin Trade in the US market.

From the chart,  one can clearly see that the margin debts peaked and then fell in the last 2 market crashes in 2000 and in 2008.   The  2000 crash occurs when the margin debts reached about 170% while S&P climbed 75% from 1997.  There is a 100% point difference between the margin debt and the S&P growth.  As for the 2008 crash,  this point difference is about 150%.   Presently,   this point difference is getting even larger at about 175% as of July 2018.   There is no definite proof that a market crash is imminent but at this level,  the risk of a market crash would be high.

How Bad will be the present Market Crash?

It is anybody’s guess.   Many have speculated for a crash to happen in mid-2015 when Margin Debt was as high as 250%.  But this crash did not happen and stock markets continue to ride higher after Trump was elected and promised to make “America Great Again”.
The following chart will show the risk of market failure is much higher than those in 2000 and 2008 because the investors have choked up 3 times as much as a credit balance to do margin trades.
(Note that the investor credit in 2008 was among the lowest because there was a liquidity crisis in 2008 where banks almost run of money.  Investors must have been using their assets rather than their money to maintain adequate balance in their margin accounts.)

Why Government Did Not Ban Margin Trading?

Most Governments realize the risks of margin trading but could not always control and contain it as it will affect stock market functions.   China experienced the worse market crisis in early 2015 when Shanghai Composite plunged about 8% in a single day.  Then the  Authority was trying to clamp down on margin tradings and risky lending practices used by China’s biggest securities brokerages.  The market has not recovered fully even 3 years after.

In Conclusion

In the 2008 stock market crash, 7.0 trillion USD was wiped off. In the 2000 crash, 8 Trillion USD disappeared within weeks. This coming financial crisis could be even larger.  

back to top

Update: 12 August 2018

Is CFD a form of Margin Trade?

CFD is an abbrev for  “Contracts For Difference”.   Many treat it as another form of Margin Trading except  for the following

1.  One will need much less capital outlays because of the very high margin or leverage in the trade.   For example,  when one takes a normal margin loan,  one will need to come up first with about 40% of the capital investment with a 60% loan.  For CFD,  the capital investment may just be 5%;

2.  The risk will be much higher due to the high leverage;  one can easily lose 100% of one’s capital;

3.  In CFD,  there is no ownership of the stocks or the underlying assets.   In normal margin trading,  one still owns the rights to the stocks such as voting,  dividend,  corporate action, etc;  however,  the brokers or the banks are given the right to sell the stock to recover their losses, if any.

back to top

Update: 10 December 2021

What is the present position of Margin Trade?

The market is again reaching a testing point after the last market hoax in 2018 where we saw DOW Future losing about 25% or  6,000 points from 28,000 to about 22,000.    Then the market was spooked by "heightened trade and geopolitical tensions".    There were not many concerns about such a crisis having any impact on inflation and therefore,  did not attract any monetary policy response.  

If a market crash were to happen in 2021 as expected after much speculation,  it could be a different picture altogether.   First,  the market has had no appreciable or reasonable market correction in the last 10 years between 2009-2019;  instead,  we saw the market's rising rate double from 5% per month to 10% per month in the short span of 21 months between 2020 and 2021.  

Rightly speaking,  the market could have continued its way up at the pace if the inflation can remain as mute as before but the last inflation rate of 6.8% has prompted market speculation that Fed is going to increase the interest rate soon to tame the inflation.  This will not be good news to those investors who have been "living" in the past using margin trades to earn a living.   The margin trade business has gone sky-high with a rising rate about the same as the stock market for the period in the last 2 years.   We should see the margin traders will start to sell their stocks as they will no longer be able to hold the increasing margin rate with the market price falling every day when there is a market crash. 

What caused the Present Inflation and Why the concern?

Many speculated that the monetary easing especially the recent one has caused this present inflation rate to rise. They are not wrong as can be seen from the following M2 money supply chart.   The chart is showing us clearly that the growth of the M2 was gradually rising over the past many years except for the last 2 years when we can see a sudden jump.   This signifies that there was an injection of cash or equivalent causing market inflation to rise.    This is because the M2 money supply is measuring the money that mostly flows within the community;  for example,  cash, and checking deposits and is easily convertible near money.   

Inflation will always attract Fed to take action in the past.   They would either raise interest rates or tighten monetary policy which would affect not only the stock market but also the rich people.

back to top

Update : 13, 15 & 17 December 2021

When will Fed Tighten its Monetary Policy? 

Fed has been using monetary policy in the past to fight inflation.  This is because reducing the amount of money in circulation will curb consumer spending,  and that will, in turn,  lower the rate of inflation.   The question is when?

The speculation in the market is for Fed to raise Federal rates before September 2020.   Wells Fargo expected 2 rate increases in 2022 and another 3 in 2023.  That was a few weeks back.   

Presently,  Global Central Banks are divided on when to have the interest rate increase in their countries but Fed Chair,   Jerome Powell,  has been expected to confirm soon whether or when the US will withdraw from the stimulus and if the interest rate should be raised sooner than expected in 2022. 

Update 15 December 2021

Fed signalled that it would have 3 interest rate hikes in 2022 and would withdraw stimulus as early as March.   It is more or less in line with the market expectation.

Update:  17 December 2021

BOE's unexpected hike of interest rate to 0.25% from 0.1% could send shock waves in the stock market around the Globe,  especially when most stock markets today are propped up by borrowed money such as Margins, etc

back to top

Update:  20 December 2021 

The following is a chart showing the Margin Balances collected by FINRA for the various months since 1997.  The chart is showing the long-term trend lines of  Margin Balances and the US long-term interest rate are moving inversely over the period;  however, one cannot say so for the short-term movement. This may be because some investors were seeing opportunities, for example,  to borrow more money to buy stocks when others were dumping the stocks.   It may be also because the investors did not feel the pain as the interest rates were rising in small steps of 0.25 percentage points each time.  

 

back to top

Update:  18 July 2022  The Possible Next Market Move 

The following charts will show that the Margin Debts in the US market have dropped to a level that could have triggered the urge to restart the engine for the US market.

One will easily notice that the curve of margin debts tended to run below and follow behind the trend of the S&P500 until the year 2005/06 for some reason probably due to a change in the SEC rules.  Since then,  margin debts have always been running and leading the S&P500.

It is interesting to observe the following:- 

Figure 5

a)  Margin debt is always a leading indicator for market crashes;  it will fall before the market index started to fall;

b)  Except for the Dot.com bubble in 2000 and before the SEC rules were changed,   the margin debt will rise first,  followed by the market and also when margin debts almost reach and touch the S&P500;

 

Figure 6:

1)   The chart shows that margin debt is no longer the main source of the "driving force" behind the market.  The investors could have found and used other sources to drive up the market, especially when such changes occurred after the latest round of QE which is also driving up US inflation at the same time;

2)   Nonetheless,  the curve of margin debt as % S&P has just hit support again.   It might have indicated that the market could have recovered provided there is no further aftermath event like Lehman Brothers in 2008 causing secondary damages to the stock market and Fed is able to control its monetary policies to avoid a hard landing.

Disclaimer:  This article is for information and educational purposes.   Readers are advised to conduct their own research and study to make their own investment decisions.

------------------------------------------------------------------------------------------------------------
Other stock articles

Tinyurl : https://tinyurl.com/y9lqscqh

How to Tell Which Country is Economically Stronger ?

 4 July 2022

People always like to compare country by country,  especially when those countries are their favourite.  Some compare them in terms of military strength;  some,  in terms of wealth and others,  in terms of economic strength.  Many a time,  the argument always ended up souring the relationship among the friends and relatives and sometimes,  among the family members.  

This article will suggest a more rational approach to comparing the economic strength and market condition of various countries. 

How?

By comparing the 5 Years Credit Default Swaps (CDS) of the countries.  If a country's CDS value is higher than the other,  it is likely the country is economically weaker than the other country.

Why?

CDS is a financial derivative that bond buyers will usually buy to offset the credit risk of buying a large quantity of a bonds.  Buying CDS is like buying an "insurance policy".   The buyers will pay a premium that will ensure that the buyers would be reimbursed in case there is a bond default.  If the bond buyer is borrowing the money from the banks to buy the bonds,  the banks might have a condition for the borrower to buy CDS before the banks give out the loan.       

Who sets the CDS Value?

A derivative is simply a financial contract between two parties,  in this case,  the buyer and the "insurer" for the swap of the credit risk of purchasing the bonds.  Credit default swaps are traded over-the-counter (OTC).  Their trading methods are non-standardized and the prices or values are not verified by an exchange.   The "World Government Bonds" webpage keeps track of some of the countries' CDS values as shown attached.

 (Doubleclick to go to the Webpage)

How to interpret?

The table has the following interpretations.  It shows not only the country credit ratings,  the 5-year CDS but also the % changes in the last 1 month and 6 months.  The important figure is the Probability of Default (PD) which is worked out based on a 40% recovery rate.

Other Information

If one were to click the country in the table,  one will be shown the following page which gives not only the details but also a comprehensive chart showing how the CDS values moved in the last 2 years. In the case of Russia,  one can see that the CDS value has risen from a low of near-zero to 12,500 in less than 6 months.  

Conclusion

The information provided in the table could be used to work out the premium for the CDS of buying Government bonds.   The table could be used also to compare the current economy and market conditions between countries.

Lastest 5-Year CDS Quotation

Please refer to this World Government Bond Website.

Disclaimer:  This article is for information and educational purposes.   Readers are advised to conduct their own research and study to make their own investment decisions.

The Nanjing Bank Incident - The Resign of the Bank's CEO

 2 July 2022

On another day,  another banking incident happened in China.  This time,  it involves a larger bank,   the Nanjing Bank in Nanjing, Jiangsu Province.  It is about a few hundred Km east of Shanghai.  

What happened?

The bank's CEO, Mr Lín jìngrán (林静然) suddenly submitted his resignation on 29 June 2022.  

The stock market and the public had taken this as a surprise.  The news caused the "circuit breaker" of the Nanjing Bank counter to trip when the bank's stock price plunged over 10% in value.  The stock price eased to end the day with a 6% loss after the bank came out to clarify that the CEO resigned on his accord after ending his 2-year term as a CEO and after he had found a new job.  

Anything Wrong?

It is nothing but common to read about CEOs resigning from banks.   This is especially so when the banks will usually warn the market beforehand,  giving where about the CEO would go in the next job.     

What happening in Nanjing Bank came as a surprise because

1)  The resignation of the CEO came without any pre-warning;  then 

2)  The was a change in the Company's stamp (印章); plus

3)  The Provincial Government step up its effort to control banking failures.

The banking analysts were quick in defending the Nanjing bank's financial position,  giving the following analysed results to calm the stock market and the public.   The local authorities were even faster in coming out with warnings about public misinformation,  requesting the public not to spread the misinformation.

The Banking Financial Position

The Nanjing Bank's position is nothing but spectacular as one might find from its financial reports as shown on this web page

(doubleclick picture to go to the website)

The most important thing is the bank has adequate funds with an asset ratio of 13.54 to cover any bad debts.  It has also a non-performing loan (NPL) ratio of 0.91.  This NPL ratio of 0.91 is much much better than many other banks for example those in Hong Kong and in Singapore. 

(doubleclick picture to go to the website -see page 17)

What could go wrong?

The following could go wrong as stated on page 53 of the bank's financial report in 2021.  The bank has a credit commitment of 393 Brillion Yuan or 58 Billion USD.  This figure is about 22% of the bank's total assets or about 10x the bank's operating revenue in 2021.  These 393 Billion are the off-balance-sheet amounts which could become a problem if they are converted to debts in the future time.

What if?

Presently,  the bank has a positive balance sheet as shown with the total assets standing at 1.7 Trillion Yuan and the total debts around 1.6 Trillion.  If the committed fund were converted to debts,   the bank would be considered bankrupt.

Conclusion

On the surface, Nanjing Bank has a healthy balance sheet if the credit committed funds are always excluded from the balance sheet. 

Update 3 July 2022

A blogger explains the same in a much more detailed manner but in Chinese

Disclaimer:  This article is for information and educational purposes.   Readers are advised to conduct their own research and study to make their own investment decisions.

Would Investors Ditch the US Bond Market?

22 June 2022

The US Government bond yields have been rising over the last 6 months.  The situation is getting worst;  much worse than China's bond yield as shown in this attached chart.   Is that a cause of concern or would traders ditch the US bond market for other markets?

Why the Concern?

Government Bonds are often seen as a safe-haven investment in the investing world.  They play an important role because they will bring income, stability and diversification.  But when there is a rising yield,  the investors become worried because they will get less if they sell their bonds.  

Why does the US's Yield Curve look that bad Today?

6 months ago,  US's yield curve looked pretty good.  It was much better & healthier than the Chinese yield curve.  But that has been changed about a month ago when Fed announced that it would raise the Fed fund rate aggressively to curb inflation.  This announcement and subsequent action by Fed in the following months have dampened the investors' sentiment. The investors are also worried about long-term growth caused by the rising Fed fund rate and the Quantitative Tightening (QT).  

China has so far kept their bank lending rate steady.  On some occasions,  they even cut the bank lending rate to stimulate the troubled housing sectors.

How do bond yields impact the stock market?

Investors will always compare the returns and the risk premium when they buy any investment product,  be it stocks or bonds or other financial instruments.   When valuing equities, investors will add the equity risk premium and compare that to the rate of return from bond yields for example.   If the bonds have better returns, they will dump equities and buy bond yields and vice versa.  

Would Investors Ditch US Bond Market?

Some investors began to worry about the US Bond market when the bond yields turned bad recently.  Some expected the investors will ditch the US bond market and prefer to buy other bond markets such as the Chinese bond market because the Chinese bond yields looked much better.    Would this happen in the near future and why?

The answer is not definite;  it would depend much on how much an investor needs to fork out to buy a Credit Default Swap (CDS) from the Derivative Market.  

What is a Credit Default Swap (CDS)?

CDS is a financial derivative that the bond buyers will usually buy to offset the credit risk.  Buying CDS is like buying an "insurance policy".   The buyers will pay a premium.  This is to ensure that they would be reimbursed in case there is a bond default.  If the bond buyer is borrowing the money from the banks to buy the bonds,  the banks might have a condition for the borrower to buy CDS before the banks give out the loan.       

What are the CDS Rates Today?

CDS rates or premiums will be different for different Governments or Corporate bonds.  

One can make reference to this quick list on this webpage for the latest quote on CDS rates for the Government bonds.  

The following picture shows the 5-year CDS value for the US Government bond is 16.6 on 22 July 2022 and for China,  it is 78.59.   China has a higher CDS value because it has a higher probability of default at 1.31% based on a 40% recovery rate.  

The quoted CDS value would be used to work out the premium to be paid by the CDS buyers.  The higher the value will mean the higher the premium.    

Therefore,  it does not mean buying the Chinese Government bonds will be more cost-effective than buying the US Government Bond because the US yields are rising.

 

  

Reference:

The 5-year Sovereign CDS rate for Various Countries

Useful StockTrading Patterns Occurring Recently

22 February  2022

Jump to 

 1)  Bear Flag in DOW  (22 February 2022)
      Update: 25 February 2022
      Update: 1 May 2022 
 2)  Top Island Reversal (Singapore Airline)

3)  Symmetrical Triangles (HSI, SSEC, Crude Oil) 

Update:  9 March 2022

Update 23 April 2022

4)  Head and shoulder pattern 

     Update 26 April 2022 (SSEC) 
     Update 10 May 2022 (DOW) 
     Update 24 May 2022 (DOW)      

    Update 12 June 2022 (DOW)

5) Candlestick Gap Covering     

    Update 23 June 2022 (DOW-Deciding Direction)     

    Update 27 June 2022 (Covering gaps)     

    Update 28 June 2022 (Failure to Cover Gaps)     

    Update 30 June 2022 (Covering Gaps Successfully)    

    Update 07 July 2022 (Possibility to cover leftover gap)   

    Update 11 July 2022 (covering leftover gap)   

    Update 21 July 2022 (covering leftover gap)   

    Update 28 July 2022 (covered leftover gap)  

    Update 1 August 2022 (covered leftover gap)

6) Support and Resistance   

    Update 16 July 2022 (SIA Support and Resistance)   

    Update 6 August 2022 (S&P 500 Resistance) 

 

 Search for stock articles in this blog

# Bear flag;  trading pattern, how to trade,  market rise, fall

There are lots of articles written about this topic.  Most of them are just descriptive although some come with graphs and charts. There are quite difficult for laymen to understand.  This article will intend to make this learning as simple as possible.  It will use animated charts where possible to illustrate;  at the same,  it will chart the stock direction using the present market prices. 

back to top

1)  Bear Flag in DOW  (22 February 2022)

 The first pattern that appears today is a bear flag as shown.    

This chart pattern appears frequently whenever there are serious corrections where the market falls more than 5% from its peaks.  In the recent market correction,  DOW fell by about 6%  from its all-time peak of about 37,000.  It then recovered about 3% just to see another fall of 4% to the present position of 33,500.   This time,  it made a "bear flag pattern" as shown above.

How Easy to Spot  & How to Trade? 

The bear flag pattern is easy to spot and trade.   One could usually tell where the price will go and what will be the target price.   In this case,  the first target price is around 32,000 as shown in the following animated chart

How will it go down?

Stock will not fall in a straight line unless there is sudden bad news spreading such as the sudden and unexpected failure of a financial institution or the breakout of war;  otherwise, the market will always want to test and challenge the price falls.  When this happens,  the stock price will want to test whether it will climb back & cross the lower trendline of the flag as shown red in the following chart:

Recently,  we have had the Ukraine crisis that sparked the market price correction.  But this war between Russia and Ukraine has not developed into war yet.  There is a pretty good chance that the market will want to test and challenge the price falls. 

back to top 

Update: 25 February 2022

As expected,  the market fell last night to touch the target price of about 32,300 last night briefly.   However, Ukraine and other crises are still very real out there.   It is expected that the market will revisit the lows again.

back to top
  

Update: 1 May 2022

DOW formed another bear flag in March.  It could have recovered if it could stay above the red trend line as shown in the chart below.   It struggled and made several attempts but failed so far which made it more vulnerable.  One would expect DOW to break its support @ 32,600 soon to make another new low. 

back to top

2)  Top Island Reversal

A top island reversal pattern was spotted for Singapore Airlines.  It is a blue-chip company in Singapore Stock Exchange (SGX).  The pattern has shown up in the daily chart as well as in the 4-hour chart as shown below.

How To Identify?

It can be identified by the island it has formed.  Usually, when the price gaps up,  there is always a rise in the trading volume,  though in this case,  the rise is not significant as shown in the following chart.  

What to look for?

For those who are looking to short Singapore Airlines,  it is the best time to do so when the price breakaway from the island.  One should place a stopgap price at the breakaway point of the last candlestick.

For those who are looking for an opportunity to enter the market again,  one will have to look for a bottom reversal pattern.  This is usually shown up in either an exhaustion candlestick (as shown above) or an exhaustion gap candlestick with a significant increase in volume.  It can be also in any other reversal pattern. 

back to top

Update:  9 March 2022

SIA failed to keep its momentum because the Ukraine war spiked oil price hikes recently.  Oil prices went up by 35% in a short span of about 2 weeks.   It could cost aero fuel to go up in price.   The SIA stock price fell immediately until it hit another exhaustion candlestick yesterday.   If there is no further hike in fuel oil pricing,  SIA might recover from here.  Whether it will "leap & bound" to a much higher level will depend on the future oil prices.

back to top

3)  Symmetrical Triangles 

The Symmetrical Triangle is an interesting pattern that is often seen in stock trading.  One can easily draw such a pattern by linking the peaks with a trendline and the troughs with another trendline.  The following picture shows 3 types of Triangle patterns:  the Symmetrical,  the Descending and the Ascending Triangles

A symmetrical triangle pattern can be found in many different time intervals.  But it is most pronounced in the monthly interval for some reasons.

Examples?

A symmetrical triangle pattern was presently found in the following exchanges

1.  Hang Seng Index (HSI)

2.  Shanghai (SSEC)

3.  Crude Oil WTI Futures

What to Expect?

One would expect the price of the stock or index to break away from the triangle.  This will occur whenever the price break-away from the lower or upper trendlines that have been trapping the stock/index prices as shown in the above examples. 

What are the Target Price to expect?

For the bottom break-away in the case of HSI,  one could often expect the target prices to be determined by projecting the price differences between the peaks and the lower trendline as shown in the following example.   In this case,  the 1st target price is 18,500 and the second target price is 12,500 if the first target price cannot hold the falling price.

The above example can also be used for the top break-away symmetrical triangle patterns or other similar kinds of patterns. Usually,  when there is a break-way from the triangles,   there should be an increase in trading volume.

back to top

Update 23 April 2022

HSI briefly hit the 18,500 on 15 March 2020 but rebounded on the second day to hit 22,500 on 4 April 2020.  Nevertheless,  it failed to recover and crept back to the symmetrical triangle.  Therefore,  one would expect HSI to revisit the 18,500 again.   If that level cannot hold the fall,  very likely HSI would want to test the next support level which is 12,500.

back to top

4)  Head and shoulder pattern

Head and shoulder is another interesting pattern that is often found in stock and indexes during the bear market or when the stock or market price has been “pushed” artificially above the unsustainable price limit.

Characteristic 

The pattern consists of left and right shoulders, a head & a neckline.  A typical pattern is shown as follows.  The neckline need not always be in the horizontal position.  The neckline often appears as a rising trend line 

Example?

This Head and Shoulder Pattern was recently found in the Shanghai Composite Index as shown.  Ir could be found also other China markets like the Shenzhen Index although the pattern could be slightly different.

What to expect?

One would expect the stock or market price to pick up steam in the beginning with market players all rushing in to take a position,  waiting for the price to rise.   As soon as the price has been “pushed”  to the peak,   the market players will expect a correction to follow.  They would stop buying.   However,   when they see the market isn’t correcting as much as they have expected,  they started the buying spree again.  This buying will push the price to form the right shoulder    By now,  most of the market players remain a "waiting and see" attitude and would start selling if there is unfavourable news emerging.   If there are lots of them dumping,  the market volume will increase;  if not, the market will retest the low and challenge the broken neckline as shown in the case of the Shanghai chart.

What is the Target Price?

In the case of head and shoulder patterns,   the target price is usually projected from the neckline's break-point as shown in the above picture.  That line used for projection is drawn connecting the highest peak in the "head portion" to the neck-line as shown.  In this case,  the target price is around 3,050.

back to top     

Update 26 April 2022

As expected,  Shanghai Composite Index (SSEC) broke the support @ 3.050.  This support was broken in one single day on 25 April 2022 when SSEC shredded about 5.1% to end the day @ 2,928.  Because SSEC broke another Head and shoulder line on its way down as shown in the attached chart below,  it is expected that SSEC will not recover from the fall until it has tested the next support @ 2,650.   And if that support cannot hold the fall,  one would expect SSEC to fall further to test the other support @ 2,500.

back to top
  

Update 10 May 2022

Earlier when DOW formed a bear flag,  we expected DOW to test 32,360 as shown here.  Since then,  DOW recovered but it made a dead cat bounce to come back and test this support again last night.  Except this time,  it has broken the  32,360 support with a fresh Head and Shoulder pattern as shown attached,  it is likely therefore for DOW to test the support of 31,250 (marked 2),  failing which,  it will test 30,250 (marked 3) & might go down further to test other supports.

back to top
   Update 24 May 2022

Dow made more head and shoulder (H&S) pattern as it went down.  It has test 31,250 recently and retraced back as shown.  It is now testing the H&S pattern.  If it fails to overcome the resistance at the H&S,  it will want to sink again to test 30,250 or the other lower supports.

back to top

    Update 12 June 2022

On its way down, DOW made another H&S pattern as shown.  This pattern appears to be quite reliable as its H&S resistance has been tested & challenged before going down.

The next target is likely to be below 30,000 as indicated\

back to top

5)  Candlestick Gap Covering

Candlestick gaps are often created when there are announcements of special trading news that might affect the stock prices;  for example, the recent news about the US's inflation hit 8.6%,  causing the market to create a candlestick gap last Friday,  10 June 2022.   Another candlestick gap was created the next trading day on Monday,  13 June 2022 as there were fears about markets falling into the Bear territory.

There are about 4 types of gaps found in trading charts;  namely,  the breakaway gap,  the exhaustion gap, the common gaps and lastly, the continuation gap as described in this webpage.

As the recent two candlestick gaps are caused by fears, they might be covered up soon when the fears go away or the events are overtaken by other events.  

back to top

Update 23 June 2022 - Deciding Direction

DOW made advances after hitting the support @29,800 as shown in the attached chart.  DOW is now stuck between covering the candlestick gaps and the testing of the next target @ 28,700 support.  This target of 28,700 was set earlier by the red H&S line.  The decision on which direction DOW would move will probably depend on how the US economy will be doing in the next 2 weeks.

back to top

Update 27 June 2022 - Covering Gaps

DOW has decided to cover up the gaps.  The first gap ("gap 1") was covered on 24 June as shown.   Then there were reports about corn, Wheat and Soy Bean prices dipping about 20%.  At the same time,  oil prices and prices of other commodities were seen dropping.  It is like the economy has suddenly turned better.

In view of the above,  it is likely that DOW would want to continue going ahead to cover the other gaps ("gap 2").   It would also try to break the declining trendline;  failing which,  it would back down to cover the "gap 3" as shown.

back to top

Update 28 June 2022 - Failure to cover Gaps

DOW jumped over 1% yesterday when it opened at 9:30 am.  it was all ready to cover  gap2 until the news about the bad CB Consumer Sentiment index came out at 10:00 am.  

That piece of bad news sent DOW tumbling down over 700 points.  DOW ended with an index of 30,950 or a loss of about 500 points for the day.  

DOW has yet to decide where to go next as it left Gap 3 uncovered.  It is very likely that DOW would cover Gap 3 next.  

Lesson:   Candlestick gap covering will depend much on stock market news.  This is especially true when there are counter-directional gaps to be covered at the same time.

back to top

Update 30 June 2022 - Covering Gap Successfully

DOW managed to cover gap 3 successfully today.  In doing so,  it almost created another candlestick gap on the way.  But it managed to cover the gap nicely with a neutral bullish candlestick before the closing time.

Going forward,  the covering of gap 2 will depend on how the economy will perform.   But it would appear unlikely for the gap 2 to be covered soon without DOW having to create another new bottom.  This is because the economy is NOT expected to look any better with the Ukraine war still going on and the Fed isn't ready to remove the QT & the rate hikes.

back to top

Update 7 June 2022 - Possibility of Covering Leftover Gap 

The strength of US stock suggested that it might have decided to go and cover the leftover gap as shown before the FOMC meeting on 27 July.   This is provided with the economic news in favour of such a move.   The job report tomorrow will likely tell if this is a possibility.

back to top

Update 11 July 2022 - Covering Leftover Gap

Dow struggled to cover the leftover gap last week.  It might be waiting for the coming CPI number to be reported at 8:30 am EST on Wednesday,  13 July.    

The following shows 2 charts:  The job report/CPI numbers and the DOW chart with the CPI release date marked.   

One can see from the above 2 charts that the US stock market is very sensitive to job reports and CPI numbers in recent months. 

For the past 6 months,  The job plus CPI reports caused DOW to drop more than 5% on 4 occasions.  The 2 months in March and May that DOW did not react was because DOW had already responded to other bad economic figures like ADP Non-Farm Employment Change or Fed's rate hikes.   

However, it is expected that Wednesday's CPI report on 13 July might not cause a big stir in the US markets for the following reasons:-

1.  As June's CPI report has just resulted in DOW dropping more than 8% without proper recovery,  it is anticipated that DOW could have already priced in July's CPI number;

2.  The commodity prices that caused inflation just started to fall in July.  The CPI report on 13 July is actually for June.   The market is likely to ignore this 13 July report until next month.

On the other hand,  if the July CPI report is better than expected,  it will proceed to cover up the leftover gap.

back to top

Update 21 July 2022 - Covering Leftover Gap

US market has been taking its time to decide its next move but the general direction appears to be going up to cover the leftover gap.

This decision could be seen from the attached business cycle chart between SP500,  US Dollars,  Commodity and the US Bonds.   

In the past business cycles, the stock prices tend to rise after the fall of Commodity and the rise in US Bond markets.

Presently, Commodity prices have dropped more than 20% since the last rate hike on 15 June 2022.  At the same time,  we see US Bond prices start to rise.  This business cycle tends to support the move to expect the Fed to keep the rate hike within the expectation of 75 bps,  bringing the Fed Fund rate to 2.5% by next Wednesday,  July 27,  2022.

Therefore,  it is likely that the market will make an attempt to cover the leftover gap before deciding to make its next move.

back to top

Update 28 July 2022 - Covered Leftover Gap

DOW finally covered the leftover gap (shaded red in the attached chart) today after Fed hiked 75 bps in the Fed Fund rate.  It is likely that it will head up to test the nearest support @ 32,600,  failing which,  it will make an attempt to cover gap 1 created recently.     

Note that there is also an existing gap created on November 9, 2020. This is a run-away gap after drugmakers Pfizer and BioNTech announced that they had come up with a coronavirus vaccine that was 90% effective.  DOW might want to challenge and cover this gap if the support @ 29,700 were to fail for some reason.

back to top

Update 1 August 2022 - Covered Leftover Gap

DOW managed to break the resistance @ around 32,600 last Friday amid the big stock like Apple and Amazon presented better forecasts ahead and also,  it was the last trading day in the mid-summer.  Traditionally, the market is expected to take a fall in the coming Monday after a rise last Friday. 

The DOW's RSI indicator is suggesting that  DOW might just want to test the next resistance @ 33,300 and then fall back down to test the immediate support @ 31,600 before going down further to cover up the leftover gap @ around 30,800.  

after note:  6 August 2022:   The reluctant of DOW jumping up and starting a rally yesterday with very good US Job Report suggested that DOW might want to head towards 30.800 to cover the gap created a few weeks ago.

back to top

6)  Support and Resistance

Support and resistance are often used by traders to buy and sell a stock.  The following chart shows all the support and resistance in red presently found in the daily chart of Shanghai Composite (SSE).

The support and resistance are usually all in one line.  This is because the support can turn into resistance and vice versa.

There are 10 events shown in the following chart:

Event 1:  shows the support has just been broken;  

Event 2:  now become the next support;  but unfortunately,  it was broken too 2 days after;

Events 3 & 4:  is the next support;   in this event,  traders sent SSE up to test the support created by event 2;  but,  the effort failed;

Events 5,6,7 & 8:  becomes the next support;  this time,  it successfully broke the resistance for the first time and sent SSE up to test the support created in event 1;

Event 9:  shows the testing failed;  as a result, traders sent SSE down to test the next support @ Event 10;

Unfortunately,  SSE broke the support on 15 July because China reported a very poor 2nd quarter GDP growth of 0.4%,  it will be testing the next support @ 3, 050.

Traders could earn more if they could also combine the use of this support and resistance chart with patterns described in this webpage

back to top

Update 16 July 2022 - SIA Support & Resistance

SIA has a similar story on support and resistance as the Shanghai Composite described above except the SIA has more Support/resistance lines as shown in this attached chart. 

Presently,  SIA has just crossed the resistance at 5.21 marked as event 8.  SIA had almost lost this "resistance turned support" on 14 July but regain it on Friday when this news about SIA having better performance was known.   The next resistance for SIA is 5.36.

back to top

Update 6 August 2022 - S&P500 Support 

The US markets were reluctant to move forward despite the fantastic Job Report figures on Friday,  August 5, 2022.   The Non-Farm Employment Change was 528,000.   This figure was more than twice the expected figure of 250,000.   However,  the US markets were not excited.  S&P 500 stayed below the resistance of 4,170.  This suggested that S&P 500 might want to go down and test gap 1 @ 3,800 created on July, 15.

Disclaimer:  This article is for information and educational purposes.   Readers are advised to conduct their own research and study to make their own investment decisions.