Has Quantitative Easing Erased the Merits of Some Technical Analysis Methodologies?

October 24th, 2012

by Dominic Cimino

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Is the question posed in the title possibly the case? I for one have been following some chart divergences of the type that have previously provided me with very useful market diagnostic tools. Yet, in all honesty, this time the divergences seem to continue on forever. Maybe the Fed's new policy tool, quantitative easing, is changing the game. After all, the use of electronically created Dollars to buy our own Treasuries is something entirely new, and would not be present in pre-QE technical studies. Perhaps divergences that formerly would be prescient within weeks or months will now take months or years to render a confirmation, as the battle rages on between Policy Makers and Nay-Sayers. Or worse yet, from a technician's viewpoint, maybe these divergences now hold no water at all. Being a traditionalist and purist, I find that hard to believe. I am more of the mindset that this time isn't different. The names are simply changed to protect the innocent, so to speak.

Or perhaps this phenomenon is explained by the possibility that we are indeed, as some suspect, at a super-cycle trend reversal, one that will by its nature take much longer to form. At any rate, let's review some chart divergences that I have been tracking much longer than I would have expected.

The first chart below is that of the S&P 500 Index. Notice how it has continued to place new post-crisis highs, even as recently as just last month. Following that chart will be a litany of charts that have recently been highly correlated with the S&P 500 Index, yet have placed recovery highs that remain intact from long ago. They include: the Dow Jones Canada Index, the German DAX Index, Japan's Nikkei Index, the Shanghai Indices, the KBW Bank Index, the Dow Jones Transportation Index, the Goldman Sachs Commodity Index, London Spot Copper, and cash Gold prices.

DJ Canada – High placed in March of 2011

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German DAX – High placed in May of 2011

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Nikkei Index – High placed in April of 2010

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Shanghai Indices – High placed in August of 2009

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KBW Bank Index – High placed in April of 2010

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U.S. Dow Jones Transportation Index – High placed in July of 2011

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Goldman Sachs Commodity Index – High placed in May of 2011

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London Spot Copper – High placed in February of 2011

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Gold – High placed in September of 2011

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In conclusion, many markets that have strong correlation to the S&P 500 Index continue to remain beneath recovery highs that were placed long ago. Perhaps divergences of this nature are now less significant, considering that the rules governing fiat currency now appear so loose. But on the other hand, because of massive interference in global currency policies, or perhaps because the underlying economic shifts are now so great, these divergent warning signals are simply taking longer for their confirmations. At any rate, before I become more long-term bullish on the prospects for a sustained U.S. stock rally, I must at least see some of these other markets move to new recovery highs as well. Otherwise, I continue to consider a possibility that I shared in my August 27th commentary, entitled Despite Stock Rallies, Divergent Signals Remain. In it, I suggested that "Either the strength currently shown by the S&P 500 will ultimately spill over into other risk-asset markets, or the S&P 500 is one of the last favorably viewed markets by global investors."

Dominic Cimino

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Preferred planning concepts, LLC & Cambridge are not affiliated.

© 2012, Dominic Cimino of Preferred Planning Concepts, LLC (You can explore the services offered by Preferred Planning Concepts by viewing us on our website at www.ppcplanning.com) Any redistribution, reprinting, or reference to this chart or content is allowed so long as reference to the author and source is acknowledged.

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