A Weighty Problem (Pt1)

TBS

Well-known member
385 0
A Weighty Problem

As a Technical Analyst I am quite happy to pick up a chart, analyse the trend, support and resistance levels, investigate any measured patterns and come up with a set of targets and statements on which direction I would expect the market to go, and what set of circumstances would change my view.

My current favourite set of long-term chart patterns exist in the headline indices – SP500, DJIA, FTSE, and Dax – all of which have displayed fairly characteristic movements over the past 10 years, and all of which still look weak, and have the potential – I believe – to go quite a bit lower.

I also believe that any respite offered by the looming conflict with Iraq – or Korea – or NATO – or Europe (please delete or add as you deem appropriate), will be fairly short lived. The only thing that will stop these markets going down in the long term is a steady stream of good corporate trading results; that is results from real trading rather than cutting back workforces or limiting the amount of paperclips available to the accounts department!

In this article I particularly wanted to have a look at the FTSE100 index – the leading UK shares by market cap. For those of you not familiar with the index make-up and the weightings, here is a spreadsheet with the current members and their rankings:

FTSE100 Weightings Spreadsheet

If you run Excel2000 or better you can automatically update the spreadsheet by clicking on the LSE logo at the top. You also have to have visited the LSE site London Stock Exchange and agreed to their T&C, which is easily done by following the pricing links – it places a cookie on your machine so that you can then go straight through to the pricing modules.

FTSE100



So, looking at the FTSE100 itself, we can see a fairly obvious bear trend and overall a large head and shoulders pattern with a target of 2400 - pretty scary stuff considering that is a further drop of another 35% from where we sit today (c3700). What should also not be ignored is that we have something like 900 points of upside available and we still remain under the overall bear trend, and that although we have had an initial retest of the break c45/4600 it has not really been fully retested as such breaks normally are.

What particularly interested me was what would have to happen for FTSE to get down to the 2400 area, after all that is still some spectacular drop from the current levels. Although the H&S reversal is obvious in the overall index, how obvious are the patterns in the individual stocks and if they do contain measured patterns, what are the targets?

Weightings

Rather than wade through the entire index, I have taken the top 12 companies, this covers approximately 60% of the weighting of the index, basically we could completely lose the odd one or two of the remaining companies and the effect would be particularly small.

The companies and their weighting are:

Code:
<table>
BP	             BP.	10.07%
VODAFONE GRP.	     VOD	8.94%
GLAXOSMITHKLINE	     GSK	7.81%
HSBC HLDGS.UK	     HSBA	7.21%
ROYAL BANK SCOT	     RBS	4.79%
ASTRAZENECA	     AZN	4.18%
SHELL	             SHEL	3.98%
BARCLAYS	     BARC	2.82%
HBOS	             HBOS	2.60%
LLOYDS TSB GRP.	     LLOY	2.55%
DIAGEO	             DGE	2.18%
UNILEVER	     ULVR	1.81%
Total		               58.94%
</table>
Obviously the weightings change on a daily basis as the worth of the individual stocks change, but this is a fairly representative view of the current top 12 companies.

Perhaps worrying is also the range of sectors represented at this level

Code:
<table>
Sector	           %FTSE	%Top 12
Banks	            19.97%	 33.89%
Oil	            14.05%	 23.84%
Pharma/ Chemicals   11.99%	 20.34
Comms	             8.94%	 15.17%
Leisure	             2.18%	  3.70%
Food	              1.81%	  3.07%
</table>
In reality, the direction of the FTSE100 comes down to the performance of the banks, oil and drugs companies, with Vodafone thrown in for good measure, if any one of these sectors has a bad day at the office, then the whole index suffers badly – and of course the converse is also true.

Charts

Time to look at the individual charts of the top 12 companies:

BP



A bear trend, resistance at 480, support at 360. The initial target for the break of 480 is 300, basis the multiple top pattern, this in itself would represent something like a 23% drop from current levels, however, what concerns me more is that to reach the 300 target, 360 will obviously have to be broken, which opens up a much bigger can of worms with a target closer to the base support at 150.

VOD



Currently neutral after the big tech dump, however there are some fairly firm levels of resistance sitting above the market, and it wouldn’t really take much to see VOD return to the bottom end of it’s range, a 30% drop. Whether it would continue to be supported at the 80p level, who knows, but if we are talking about a situation where banks and oils are falling over, then I would doubt that this level would hold – however, lets stick with 80 as a target for the moment.

GSK



This is just plain ugly! A massive double top through 1400, with a target of 500. Not unexpected support at the psychological 1000 level, but 500 looks like a ‘do-able’ level from this chart – again, similar to FTSE, although the 1400 level was retested quickly it hasn’t been retested in ‘slow-time’ so even a first-shot rally has plenty of room to move under the current trend and resistance levels.

HSBA



Considering the carnage seen by many FTSE100 companies, HSBA has held up reasonably well (if you can call 40% or so from the highs ‘well’). However, the distribution pattern forming over the past 4 years is starting to look ominous. If (and it is only if) the 600 level is breached, then we have the completion of a head and shoulder reversal with a target c150 – which really would be something! At the moment it is holding although still under a short term bear trend, but this level is key.

RBS



Again, holding up quite well considering the overall market conditions, still above it’s long term bull trend but suffering in the short term. The key level here is 1150, this opens the way up for yet another head and shoulder reversal with a frightening target c 300 or so. The good news is that the pattern still remain incomplete and the price action remains around the 1300/1600 range at the moment.

......cont next page
 

TBS

Well-known member
385 0
Pt2

AZN



Teetering on the edge of the abyss, we have already seen the triple top play out through 2800/2900 with a target of 2000, but now look at how important 1800 is as a support level. If this level is breached we could very easily see another 800-1000 points disappear very quickly, giving AZN a target c1000. The move downward has been so fast that the price action needs to retrace to give us a more sensible rate of decline, even seeing 2800 again would not detract from the spectre of 1800 as we would still be under an overall bear trend.

SHEL



We go up, we go down, but at the end of the day SHEL looks like a chart that is going down. The breaks and retests of support and resistance are like a stepladder, eventually ending in a 4 year head and shoulder reversal through 425 with a target of 200. Again there is plenty of overhead space for a retracement within the overall bear trend but even the 10 year base trend has now gone.

BARC



Another typical ‘bank’ chart, the long term base trend line is still in force, despite a top to bottom drop of some 50%. The key level in the chart is the obvious support at 330, although arguably a double top was broken at 360. My target for the break of 330 is 100 – another scary level. Yet again, the demise has been so fast that some form of retracement to help form a more sensible down trend is expected.

HBOS



As you can see, the problem with this stock is that there is little history to play with. However, we have a pretty obvious bear trend with levels of support and resistance. Currently the key level is the base 520 support. The chart itself looks like a descending triangle pattern which, if 520 is broken, would pave the way to a target of 260 and as ever the head room still exists for a bull retracement within the overall long term trend.

LLOY



Not a typical bank chart, definitely the worst of the bunch by a long chalk, this looks in deep trouble to me. If ever a major bank in the UK is going to go bust, this would be my favourite at the moment – purely from a chart point of view. Whether we look at the double top, or the bear rising wedge the target for this is something in the order of 200.

DGE



The explosion in price over the past 5 years looks like it is unravelling quite quickly. The head and shoulder pattern has now been completed and we have a target somewhere in the region of 390, the base support for the past 10 years – again plenty of space to rally and still remain under the current bear trend.

ULVR



I suppose the last thing to really suffer is food, we still have to eat, even in a nuclear winter! ULVR is the one chart in the top 12 that doesn’t have ‘immediate carnage’ written all over it and could very easily become a defensive home should the bank and oil sectors start to break down further. Although currently neutral, it still has a critical support level at 475, a breach of which would give a target c300 – certainly a return to the reaction lows at the beginning of 2000 of 325.

Summary

Right – lets put the figures into the weightings spreadsheet:

Code:
<table>
Stock	         Target
BP	           150
VODAFONE GRP.	    80
GLAXOSMITHKLINE	   500
HSBC HLDGS.UK	   150
ROYAL BANK SCOT	   300
ASTRAZENECA	  1000
SHELL	           200
BARCLAYS	   100
HBOS	           260
LLOYDS TSB GRP.	   200
DIAGEO	           390
UNILEVER	   300
</table>
The figure I get is 2463 (phew), bearing in mind this is just the top 12 companies, representing c60% of the index, and I have perhaps been leaning towards the bear side of the equation, this shows that 2400 FTSE100 is a very real target should the next set of support levels be broken.

These are Armageddon, fiscal meltdown numbers, but that is what this set of charts is pointing to. Most have not broken their main support levels – yet – but please be aware that these are all key levels within the charts, points at which I would expect a complete failure of confidence in the stock market. This is depression not recession, and probably falls not too far from the scenarios painted by Bob Prechter from Elliott Wave International but from a trend, support and resistance basis, rather than EW.

Pass the tin hat........

If you wish to discuss this post directly with TBS, please do so at TheBlindSquirrel as it may appear on several sites.
 

neil

Legendary member
5,167 747
Excellent post TBS. It's nice to have an overview of the market in one place.
 

romun

Junior member
22 0
TBS
Surely this must be one of the most thought provoking threads on T2W. I read it through shortly after it was posted and was unable to return till tonight expecting to see numerous replies.
As someone who has come fairly recently to TA and who is certainly convinced about the merits of shorter time scale analysis but less certain of its worth over a period of years I find your arguments interesting. This must be an ideal opportunity to put long term TA to the test and I look forward to following this thread over a time scale which will perhaps prove things one way or another.
This is the kind of stuff that I joined T2W for. Thanks for sharing your thoughts.
romun.
 

Trader333

Moderator
8,590 922
FTSE100 Lowest Level

Hi TBS,

In my view the FTSE100 will not drop below 2800 and this is because at this level the return for an investment of £1 is greater than that given by interest in a building society. Mind you that is still a drop of 900 or so points.


Paul
 

ianshep

Junior member
17 0
Paul,

That's an interesting observation, but there is no particular reason why a falling FTSE should stop when the yield equals the 'risk-free return', normally quoted as the yield available from long dated gilts.

Many individual shares yield much more than the risk free rate. Why? Because the market believes that the dividend cannot be maintained and/or that further capital losses or even bankruptcy are possible.

The same argument could be applied to the index as a whole - if the risk of holding shares is perceived to be high, holders will require a yield premium for doing so. By the end of the Great Depression, the Dow was yielding 10%.

BTW, there is an interesting, long term analysis of the Dow yield here http://www.zealllc.com/2003/dividend.htm. The last graph I found amazing - that the Dow yield hasn't yet even left bubble territory and returned to the historical 'expensive' range, never mind 'cheap', where major bear markets typically end up.
 

TBS

Well-known member
385 0
Compared to its peers, the Dow has held up remarkably well - however when you consider that this is the worlds top 30 companies (in theory), then it is really the last bastion, when confidence is lost in this lot, then we are really in trouble!

Personally I regard the SP500 as a much better guage of the US markets, certainly most 'professional' traders I know wouldn't even know what the Dow levels are but could recite all the important SP levels off by heart - unfortuantely the press have a fixation with the Dow as the 'world leader', which it is in terms of the companies involved, but not as an overall indicator of the US economy - imho!
 

ianshep

Junior member
17 0
Hi Sandy,

In the case of the article I refer to, the analysis covers the whole of the 20th century to see if there are 'typical' yield levels that mark the major tops and bottoms.

It's for that reason that the Dow is used - the data isn't available for the Johnny-come-lately S&P500.
 

TBS

Well-known member
385 0
Hi Ian

It will be interesting to see how it plays out - whether the reality of a declining economy will outweigh the change of beating up a few muppets in Iraq

As Mr Pratchett says 'May you live in interesting times!'

Cheers

Sandy
 

Helenqu

Established member
841 3
TBS said:
As Mr Pratchett says 'May you live in interesting times!'


Yes he said it but not first :)
NOBLE Reference Files

"May You Live in Interesting Times"
In a speech in Cape Town, South Africa, on June 7, 1966, Robert F. Kennedy said, "There is a Chinese curse which says, "May he live in interesting times." Like it or not, we live in interesting times..." Journalists picked up the phrase and it has become a commonplace.
However, the popularity of this "Chinese curse" puzzles Chinese scholars, who have only heard it from Americans. If it is of Chinese origin, it has somehow escaped the literature, although it may be a paraphrase of a liberal translation from a Chinese source, and therefore unrecognizable when translated back to Chinese. It might be related to the Chinese proverb, "It's better to be a dog in a peaceful time that be a man in a chaotic period."

Stephen DeLong, who has been researching this quotation for several years and details his quest on his own website, has traced the quotation back to a 1950 science fiction story: "U-Turn" by Duncan H. Munro, a pseudonym for Eric Frank Russell.
 

TBS

Well-known member
385 0
Thanks for that Helen

Helenqu said:


Stephen DeLong, who has been researching this quotation for several years and details his quest on his own website, has traced the quotation back to a 1950 science fiction story: "U-Turn" by Duncan H. Munro, a pseudonym for Eric Frank Russell.
Typical academic - sounds like he needs to get out more!
 

zambuck

Experienced member
1,608 102
TBS

...very interesting post and observation....thanks for taking time and effort to share this with readers....
 

kevin546

Established member
699 0
TBS

Excellent post. On avery simplistic note for the FTSE if one was to consider the original rise to just below 7000 from around 700 points all those years ago. Then if you apply retracement or fibonacci figures to the present retracement then we have yet to reach the 62 - 66% range to do so the price would have to go down to around 2800/2900.

I follow price sequences and often make good use of retracement levels to gauge what the next move on an intraday chart will be. When I see price sequences often in the final stages the 60% level is broken and you get nearer 85%. The price temporarily broke through the 3600 level of a descending triangle which suggested a drop of around 800 points from 4000. The 50% level has already been breached twice so I agree with you that it will move lower and I suspect test or go below the 60/66% level.

regards Kevin
 
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