International Indices

The German DAX index closed at a new 52 week high today.  This is important.  It should be telling us something.  It is telling us that bearish fumes are evaporating quickly now as we move well into the second half of 2010 and that bulls may want to start running again as the consumer comes out of the shadows again.

Despite the new 52 week high today for the DAX there is still room for another downward consolidation.  But if a downward consolidation starts it is well supported by a very strong demand line that appears to be the bottom part of a large ascending triangle formation since April 2010.

It is very difficult for me to see anything bearish about the DAX right now.  I think it is another little clue about what the US markets will do soon.

It is interesting to me that the DAX is leading like this.  Clearly it has a lot to do with the Euro that was absolutely clobbered in months past and made German goods more competitive to the rest of the world.

This consolidation since April 2010 is a good 3.5 months of sideways cause which is more than sufficient fuel or energy for a new more sustained move.

The Jakarta Composite is trading at lifetime highs in what I consider to be one of the most amazing stock market recoveries I have ever seen.  I am posting this chart just to show that sometimes the ‘unthinkable’ can and does happen.

Looking at the chart below near the early 2009 lows it probably seemed as though a super fast recovery and then new life time highs would have taken many years to develop.  This was not the case at all.  Once the Jakarta Composite started rallying again it seemed to never really stop until it got back up to the old all time highs and then did a handle formation to complete the large cup and handle chart.

This is one monster of a stock index and so it would seem that Indonesia is turning into a monster of an economy.

If you put the sp500 chart next to the Jakarta Composite it would seem that the US markets could make a similar run back up to the old highs.  Sometimes the impossible is possible in this crazy wide range swing trading type market we are in now.

The chart of the German DAX was always the chart that has kept me skeptical about a ‘super bear’ in our own markets.  During all the volatility between April to July 2010, the DAX was always just consolidating and very resistant to breaking down.  This was a huge red flag to those that were looking for our markets to fall apart because of the so called European debt crisis.

If things were so bad in Europe then why was the German DAX trading so strong?  Probably a lot of it had to do with the plummeting Euro making German goods more competitive price wise.

I have to admit that to a certain degree I was in a large state of denial when I occasionally looked at the German DAX index.  Interestingly I don’t recall ever doing a post on the German DAX or including a chart of it either.  Perhaps that was because I did not want to believe what the chart was telling me.  It was telling me that the mega bear scenario was a farce and that it would be very prudent to respect potential bullish scenarios.

So, lesson learned. 

The weekly chart of the DAX currently has a bullish weekly MACD buy signal and from the looks of this chart is within inches of hitting a new 52 week high above 6330.  It may not succeed in doing so right away.  It could pull back to one of the two blue uptrendlines seen in the chart above and still remain long term bullish.

Looking at this chart tells me the odds are quite good the sp500 blasts higher in the days and weeks ahead back up to the April 2010 highs.

Britain’s FTSE 100 is also shaping up quite bullishly although not nearly as good looking as the German DAX.  The FTSE 100 is perched right under its well defined bear market channel line and looks to move up over it soon.

The bullishness is simply astounding lately.  It is remarkable.  Undeniable at this point.  It seems like we are up almost every Monday of the week, every Friday of the week and most days in between.

So that must mean we are overbought and ready for an extended nasty decline that will be horrible and scary right ?

Not necessarily.

Yes sentiment is at extremes, technical indicators are at extremes and it really does feel like at least a minor or intermediate pullback is way overdue.  But my take going forward continues to be that the market will keep trying to frustrate the heck out of those who wish to short it.

I tried to short this market several times since October 2009 and most of those attempts failed.  The only one that succeeded was the one in October 2009.  I was lucky to catch that mini decline.  But all the other attempts failed.

Why did they fail? They failed because the primary trend is still very strongly up and in that type of environment every pullback is generally weak and the strong upward trend is eager to reassert itself.

The issue now is what should your general 1 to 2 year trading bias be? Is it even possible to have that long a forecast?  Generally speaking the farther you go out in terms of time, the more difficult it is to get a handle on potential price bias.

Unless…

Unless you have some very large patterns to work with or some other major market clues ( such as foreign indices or commodities ).

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I have been keeping the China Shanghai Composite Index in my index of charts for quite some time now because I felt it was a very important leading indicator and generally good index to look at from a long term perspective.

Now here are the three important facts I wanted to bring to your attention regarding the Shanghai Composite index:

• During the 2007 to 2008 period, the Shanghai Composite Index went through a MASSIVE almost 73% decline which almost puts it on par with the great 1929 decline of 90%.
• The Shanghai Composite started recovering 4 to 5 months before the SP500 recovery got underway.  So in a sense the Shanghai Composite led the recovery, although admittedly from a more severe 73% decline as opposed to the almost 50% decline in the sp500.
• The Shanghai Composite could be near the final stages of developing a MASSIVE head and shoulders bottoming formation which could soon send it into orbit in 2010-2011 time frame and perhaps eventually to the old record highs.

I am very bullish on China and Chinese Stocks and the China economy in general.  If we get a bullish breakout from the chart above then the chart is going to agree with the economics.  That a massive phase of expansion is going to take place in China during the next few years.

The interesting thing about this chart is that it almost looks like the 1929 period where after the decline ended in 1933 the market recovered, then formed a base and then shot higher very persistently for quite some time.

But there is still plenty of work to do on this index.

Now the question is how the behavior of this index is going to relate to the what the US indices do.  I suspect that the US indices will follow the leader in bullish fashion but I still think it remains an open question whether the US markets can mirror the performance of China.  I doubt it. 

What may happen is that the US markets still get a continued uptrend going but only as the ‘slow dog’ that underperforms.

Remember when the Japanese Nikkei was blasting higher in almost vertical peak fashion into 1989 time period?  That was interesting because at that time the US market was generally quite sloppy.  So it will be interesting to see if something similar happens going forward, that China takes the real lead and massive capital flows move proportionally out of the USA into asia and cause a similar divergence to what existed between Japan and USA during later 1980’s.

But I suppose one cannot rule out once again all markets moving up in one grand orchestra again… We may know the answer to that question by second half of 2010.

So in summary, I suggest contemplating the massive Shanghai Composite index head and shoulders bottom formation (although not yet confirmed) because it has potentially very bullish implications.  And if it realizes it potential, it would seem to fully negate the longer term bearish deflationary scenarios I am sure you have heard (ie. breaking the March lows and moving into new persistent downtrends).

I think the 500 billion plus economic stimulus package that the Chinese implemented is working, not just working but working really well.  Just take a look at the Shanghai composite Index.  The rebound recovery rally in the Shanghai composite started about 4 or 5 months earlier than the USA’s recovery rally as measured by the SP500.

So far the Shanghai Composite is up about 104% from the intra month lows in late 2008.  Wow.  That is pretty amazing how far this index has come and how fast.  It has me thinking that if this index continues powering higher up and through the 38.2 fibonacci retracement level there is probably going to be a mad panic rush to China stocks.  Of course there already has been plenty of activity in Chinese stocks, but it could go into overdrive with the cooperation of this index.

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