2020. Change is in the Wind | Bruce Fraser | Power Charting


music 2019 was a rip-roaring year in the
stock market should we expect the same in 2020 or is there change in the wind?
Hello I’m Bruce Fraser welcome to Power Charting. Happy New Year. So let’s start
the new year off with a market study and integration exercise using the Wycoff
method and other ancillary tools to draw some conclusions about how the year 2020
might start. The present position of the market index is our subject for today
we’re going to look at Point & Figure count objectives, we’re gonna look at
sentiment, the monetary backdrop, long term price structures and then ask the
question, “Is the trend of price climaxing and it should we be watching for a
change of character in price?” So with that in mind let’s get started. We can
see here from this chart which you have probably seen before which was published
a year ago that a cause was built. We always in Wyckoff look for a cause of
accumulation distribution area cumulation redistribution we look for a
cause that’s countable on a point and figure chart to proceed an important
move an important trend and so here we saw that at the beginning of 2019 when
the markets were in the depths of this big downtrend oversold that a cause was
built in this cause produced a count across this 22,669 level it produced
a count up to 28,313-29,254 a really big count in a very short period of time
as a V bottom was being formed. So we published
this at the time well as of the end of the year
we had a peak that was made at 28,872 which was right in the middle of
this range of objectives that was developed back at the beginning of the
year so as the year began the market went into an important uptrend and this
uptrend went on right to the end of the year and put in this count objective
almost on the anniversary date of the beginning of the bull run ok so let’s
look at this a little differently here is a vertical bar chart and this yellow
box down here is the area that we took this count from and we put it on the
vertical chart and you can see here is the count that we just discussed we’re
right in the middle of that area now you can see that the 28,868 level was
attained here and there is an important re-accumulation area that formed in
August so we’re going to take a minute and look at that count also that count
takes us up and I’ll show you the P&F in a minute 29,509-30,177 you can see
that the 29,509 number is very close to the extreme count here 29,254 so we
would call this a confirming count so the re-accumulation count is
confirming the accumulation count at the beginning of the move and so this low
was made on Christmas Eve 2018 and we can see that it has gone right up to the
anniversary date in the end of 2019 so drawing a trend channel we can see that
using the classic traditional form of trend analysis the Wycoff method
where we take two adjacent lows and we draw a trendline across those we can see
that this trendline has gone up has been touched again in early October as a very
important swing trading rally had developed and then this rally carried
the in this case the Dow Industrials right up to the overbought line which is
this dotted line and here we are at the end of the year going up in a rather
dramatic fashion up into the overbought condition as defined by this trend
channel and so we fulfilled point and figure count objectives we’ve had a
confirming count we’ve had a phenomenal epic 2019 uptrend
now we’re overbought at the top of the channel and point and figure objectives have
nearly been fulfilled you could argue that they have been
fulfilled actually so with this in mind the fuel tank is almost empty we’re at
the top of a channel which is an overbought condition what should we
expect next here is the point figure count that was the re-accumulation count
that came in August of 2019 and this count you can see across here is a count
that produce this objective that could possibly get us over 30,000 here in the
not-too-distant future and then I actually added this additional count
larger count more speculative which takes us up I just put the conservative
count 31,668 so there’s actually a larger count available and we’ll call
that a speculative count at this time so now here’s another interesting
development as we have come into the end of the year now this is intraday you
know how I love to do intraday point and figure
this is five-minute data so very short-term data three box reversal
method of ATR scaling and so there is a re-accumulationn on a very minor scale that
formed in the end of this accelerating uptrend and what I’d like to point out
because we might look at this and say this is distribution
well what would diminish the likelihood that this is distribution is look at the
volume we have volatility coming in as we’re going through this sideways action
but notice how on the declining columns as we can see with the the red here look
at how low the volume is the volume is quite low which shows that no supply is
coming in as volatility is developing which leads us to think ah, this is
re-accumulation not redistribution this is not out of its range yet you can see
it’s just right there but this small re-accumulation has given us account in
the area of the count line of 28,531 has given us a count to 29,317-29,425 on
this more conservative 11 column count and that is another re-accumulation
confirming count similar in its objective to the one we looked at from
August and so then we also if we extend our count out to this larger area which
is the breakdown to this low which produces an up thrust but then back into
the range again this K takes us 29,777 to almost 30,299.12 and so there is
evidence here that suggests that the market
might just continue to accelerate up into this 29 area 29,000 area before
this uptrend is done let’s take a minute and talk about interest rates because
2019 was a very important year for the interest rate environment because of
what happened prior to that notice here this is the two-year note in the
two-year note going back to late 2016 the data here but look what happened the
Fed had become had come into a tightening posture during late 2017 in
the fourth quarter and you can see that the Fed became in there tightening
posture had had the effect of causing interest rates to go up
for both the two-year yield and the 10-year yield this created a lot of
stress in the financial markets and actually produced a bear phase for bonds
and also we recall that in October of 2018 the stock market just went into a
big decline in it right into the end of the year which produced the V bottom
that we just studied so here we can see that this rising interest rate
environment was quite difficult for the financial markets and also notice this
line up here is the yield curve line well the yield curve was flattening all
the way through there and flattening yield curve is a sign of a tightening
environment by the Federal Reserve well now we have a sideways yield curve
situation and we had literally only one week where the yield curve went inverted
but here’s the part that is so important to us is look at the decline in interest
rates as the Fed became accommodative in 20
late 2018 and through 2019 and this is the high-powered money that came in to
the markets which helped to propel the big upward move in the stock market in
2019 so there was a very easy money environment a lot of liquidity being put
into the system part of this is related to the fact that 2020 is an election
year so the Fed any policy moves they’re gonna make they want to make those prior
to an election year because they don’t want to appear to be political in the
election year itself so if they’re going to pursue an easy money policy they
really have to do that work in 2019 and honestly one of the jobs of the Fed is
to help the incumbent administration get reelected and so they are pushing
liquidity into the system which immediately goes into the financial
markets and then with the lag starts to work its way into the real economy and
this is part of our discussion for 2020 is that the liquidity and the lower
interest rates that occurred in 2019 is going to to create a condition in 2020
where you’re going to have a stronger economy you’re going to have a GDP
growing further tightening of the employment
market rising wages as a result of a tight labor market and also investment
in capital equipment that is in inventory and growth by businesses to
that they’re going to want to prepare for improving economic conditions in
2020 and so this is the thing that businesses are going to be looking
forward to and in trying to plan for and so now we would expect the Fed to become
neutral and get out of the way and let the politics go where they’re gonna go
as 2020 unfolds but this is a good environment for the economy this is
going to be a good environment for potentially a good environment for
financial markets and we’re going to talk more about that in a minute because
that’s what we really care about is how the financial markets are behaving
relative to the economy so these are yearly bars going back to 1925 this
shows that we’ve had an epic bull run that started in 2009 at the end of the
Great Recession and then look at this last bar this is through December 31st
of this year of 2019 and look at the sheer magnitude of this bar and we know
that the bar opened on the low of the year and closed effectively on the high
and so we have this big uptrend we just looked at how the year unfolded let’s go
back and just look at that for a minute so here’s the year you can see that
there were some ups and downs along the way but this is the year 2019 that had
just such a incredible run upward and with good point figure count good trend
channel development and so on and so we can see that this is what the year look
like but it opened on the lows and closed on the highs and so
going back this is arithmetic scale and so why it looks so crazy so you can see
each one of these years all the way up in this really epic bull run have been
pretty strong with the most recent year being strongest and so can we ask the
question is the bull market accelerating or is this a climax that will stop the
advance so we will try to answer that question as we go along here but only if
I can keep track of the time so this silly chart arithmetic scale which I
know you’re all going well you don’t draw a long term chart arithmetically
because it because of how the chart is so compressed to lows well here’s the
logarithmic scale and this is how classically we would take a chart and
draw it here’s 1925 and here’s the 29 crash the 32 low the Great Depression
and this is the trend channel that I’ve drawn using the principles of Wyckoff
where I’ve drawn it on two adjacent low points in this case the 42 low which was
in the depths of World War 2 truly a time when there was serious doubt about
the ability to be able to prevail and come out on top of World War 2 so a very
dark time for the world and here is the 1974 low which ironically is in the
aftermath of the resignation of Richard Nixon after he was sure to be impeached
in prior to that so here is the low that followed Nixon’s resignation and so here
is the 42 low and it draws this big upward channel in the low of
the Great Recession in 2009 you can see it came became very close to touching
the demand line of this trend channel and what we’ve done is we’ve drawn a
parallel line which we call an overbought line and we take it off this
high point here and you can see how well this overbought line has contained this
the trading of the bull market and here in and this is the S&P and here you can
see that in the dot-com bubble that there is a throw over of the channel for
all of five bars and so it just so happens those five bars are five years
and this is a wickedly bad bear market especially for the Nasdaq the dot-com
stocks but there’s an attempt to come out of the channel and then it comes
back in pretty quickly and then it adheres to this channel for this is the
bull market of the first decade of the century 2000 to 2010 2009 and you can
see here that the run-up in this bull market is interrupted by the Great
Recession then here is the epic bull market that we’re in now we’ll look at
what has happened so we have here a run-up and this chart was through
December 31st of 2019 look at the rally up to the overbought line well the
market has become exactly overbought on that line at the end of 2019 and so this
is really interesting and I would make the case here that even if this market
can get out of this channel which I think it can and we have talked about
this in Prior episodes we’ve looked at long term point figure charts and we’ve
looked at price objectives that take the Espie much higher than this level now
does it have to go up to those levels no not at all but this is really
interesting because this is an overbought condition and I think this is
going to represent resistance to advancing for some period of time how
long I don’t know but you can see over here that these bars all adhere to the
overbought line before failure of and decline okay so with that in mind we
have an overbought condition and some kind of likely resistance that for some
period is likely to overcome or or hold back the market now this is just a
schematic of a reunion trading range I want you just to keep this in mind
because we’re going to talk about the area that’s in pink here as we unfold
the idea what’s going to come next so we’ll come back to this but we have as
we come as we’ve come into this rising trend we have a point for your account
that’s been fulfilled we’re at the top of a channel we’re a top of a channel a
very long term yearly channel and a daily channel so we looked at both of
those but the market has been somewhat climactic into year end now let’s talk
about sentiment and well we’ll look at that in a minute but I want to show you
this chart which you may have seen this in the past I showed it once before in
an earlier episode but I want to add to this with some additional thinking this
is a 116 year span of data but it’s every fourth year and this is the U.S.
presidential election years going back a hundred and sixteen years and they’re
all added together summed up day by day through the year and summed up and then
indexed to 100 and it shows the the trend the
average trend of index prices throughout the course of the election year so let’s
say that this is 2020 that this is an average now we know that the year is not
going to turn out just like this but it could have a family resemblance so let’s
keep that in mind because we know that in this case there’s been an important
rally in 2019 up in to the end of the year we are now in the new year we do
have higher point and figure counts which could drive the market up higher
we saw into the mid 29,250 to 500 area for the Dow Jones and so
we can see here that we could be in the throes of a buying climax because we’ve
used up all the fuel in the tank of our point and figure analysis and so the
thing that would happen after a buying climax is an automatic reaction and an
automatic reaction is a big bout of supply coming in selling on volume which
stops the advance so when we get that we draw resistance about buying climax
extremes below the automatic reaction low and then we watch for a trading
range which could either be re-accumulation for another move up or
distribution for another move down well in fact we recall that the Fed has been
quite accommodative has put a lot of liquidity into the system and interest
rates are quite low and so this is all a backdrop that tends to help support the
economy and the stock market so here we can see here that we have a classic
Wyckoff structure of re-accumulation that we can draw on this schematic a seasonal
average of the election year and we can see the
the first half of the year is a trading range and this trading range what it
does in Wyckoffian terms is it allows us to consider the possibility that this
is fuel being put back in the tank as stock goes from speculative hands
which tend to be weaker into strong hands of the composite operator types
and that they will accumulate shares throughout this six-month period because
the tendency in the presidential election year is for in the second half
of the year to have a really important rally that takes the market in this case
we would argue to new high prices and so this yellow area represents an
example of where a point and figure count could be taken that gives us a
very large six-month count for an important move higher which would then
take us out of the above the overbought condition on the trend channel we saw on
those yearly bars and so we need to build cause or count for another move up
so looking at this we see an important trend that comes in to the end of the
year but the first half of the year is spent going sideways which requires us
to consider tactics for how to manage a trading range for some period of time in
this trading range also respects that resistance area that we saw on those the
yearly bars of that very long term chart that went up and touched the overbought
line so it gives the markets six months to rest at that level before a new
Uptrend can unfold so and then in a summary of this sorry
2019 rally needs a rest we can see that it’s used up its fuel we’re gonna look
at sentiment in a minute briefly which is going to show that the sentiment’s
become quite bullish or extreme also a new cause needs to be formed and we can
see that in this seasonal chart the ability for that to develop and so this
would be a reoccurring type structure stock returns in these structures
trading ranges to strong hands and then the uptrend resumes so here we can see
this re-accumulation chart again we’re looking for a buying climax an automatic
route reaction resistance and support to develop and then a period of time of
recharging the batteries for the next bullish uptrend in the market now lastly
in the little bit of time that we have left let’s look at sentiment so this
thanks to Pring-Turner and the last chart the seasonal chart is thanks to
season acts with permission they have allowed me to use this chart I
appreciate it very much and Dimitri Speck is the great analyst at
Seasonax so here we can see that at the beginning of 2019, December 21st, the
extreme the the fear and greed index was all the way down at 3 if you want to see
the components of this index search for CNN fear and greed index in Google and
you’ll find it and see the components all the way to 3 just can’t get any
lower than that and by the end of 2019 the fear and greed index had reached 91
and so that was on the one-year anniversary of the low December 24th
2019 and when I checked it at the beginning of 2020 on the second I
believe it was it was at 94 it just doesn’t get any higher than that
and then also just to conclude put call numbers are extremely
high showing a lot of call buying and this call buying also is indicative of
an extreme amount of bullish sentiment also bearish sentiment would be when the
put buying is high you can see that comes around the lows and around the
highs you have a lot of call buying and finally this is from Bloomberg and this
is the amount of short interest in the SPY ETF and you can see that it’s as low
as it’s been all the way back at the beginning of 2018 when the market had a
pretty good reaction and formed a range bound condition and with that thank you
so much for spending time with me I’ll see you next week have a great week

9 thoughts on “2020. Change is in the Wind | Bruce Fraser | Power Charting

  1. I'm always very impressed by your presentations. First of all the quiet and thorough explanation of your charts, analysis and conclusions but of course then come the messages and how well you make your case, always measured and respectful towards the markets. You'r presenting sometimes bold prognostications (which usually happens to become true as far as I can follow you) but you never sound like one of these excited market gurus that appear on stages. Thank you very much for taking the time to share your insights and I wish you well for the coming year! I'm hoping for regular updates on this site …

  2. 8:13 I wonder why this count is not from O to O, usually you count from an O to an O? And I also wonder why you did not take the previous big lag down of O's into consideration. Are you holding seminars where I can ask this kind of questions?

  3. I want to thank you for putting these videos out. My charting skills are good but not to this level. I say that because you have an ability to find and address all those little mental notes that add up during the week and explain them through charts in a coherent and meaningful way. For example when the charts have been pointing to drops that don’t materialize or are much smaller than expected I’ve been puzzled, but re-accumulation makes perfect sense. So thank you. I look forward to your next video.

  4. Excellent presentation. The polls I have seen does not suggest an overly positive sentiment, with bears balancing the bulls in a recent poll of big investors. I would not believe CNN in any info they give.

Leave a Reply

Your email address will not be published. Required fields are marked *