“Do not ignore this chart,” shouts Murray Gunn, Head of Divination and Rune Casting at HSBC, in his daily Short Cycle report. So here we are, pointedly not ignoring it.
In case any of you are not fluent in the art science of scratch augury, Mr Gunn provides an explainer …
The S&P 500 Computer Hardware Index has outperformed the market by a huge amount since the start of the year and has been leading the general rally higher. But last week saw a bearish engulfing candlestick in the index.
This is when the open and close engulf the previous day’s open and close. The market gaps up at the open but is then hit by a wave of supply that takes the market down to close below the previous day’s opening level.
Surely this can only mean an imminent collapse!
It doesn’t have to mean an imminent collapse, but it is a very good sign that the previous trend is exhausting and that psychology is changing. In this case, the bulls are losing control of the market.
The big down day also came on a spike-up in volume and at a significant long-term resistance zone. In common with the broader indices, volume has been declining during the rally since late 2011, which is another sign that there has been no real horsepower behind the move-up and that a reversal lower is a significant danger.
This chart is further evidence to suggest that the broader bear market rally in stock markets since 2011 is coming to an end.
The S&P 500 was listless at 1,360 at the time of publication, while bearish candlesticks were going for £29.50 plus postage and packaging.
Related link:
Rally Monkey gets sucked into the self-referential vortex of psychologically important thresholds – FT Alphaville