While most technicians, especially under central planning when the best laid charts can collapse overnight when Yellen sneezes or the BOJ decides to monetize more than 100% of its gross annual treasury issuance, have the same track record as a windsock some are most respected than other, thereby creating a self-fulfilling prophecy based on their forecasts. Chief among them is Tom DeMark, whose “math based” pattern analysis has been used by such hedge funds as SAC during its golden years (supposedly to solidify the “sure thing” that expert networks had previously leaked). DeMark bristles at being called a technician: “We identify areas of trend exhaustion, whereas technicians are trend followers. So it’s not really the same.” Whatever he is, it has worked well in the past more often than not.
Earlier today, DeMark appeared on Bloomberg TV and had some more bad news for both Chinese stocks (in case the plunge from up 60% on the year to down 10% is not bad enough) whose drop DeMark did predict accurately, but also for BTFDers of the S&P500.
This is what he told Bloomberg TV’s Tom Schatzker earlier today on what to expect in the Shanghai Composite:
What we see in China is a continued slow and slowing decline in the market. And June 12th, when the market was at 5177, we predicted a decline that would take us down to 3198. We had projected downside. And it was pretty much in track with the decline in 1929… We thought it could develop into something similar to 1929, but it was a longshot and we got a lot of publicity. And people didn’t pay any attention to the follow-up, which is that the market had to meet certain preconditions, and the market reversed upside. There are preconditions into the low of 3200 in the market just didn’t meet the requirements we are looking for. So we’re going to see continued erosion. We should see the low of last week, 2580, undercut. We should see 2590 probably before this market bottoms.
DeMark compares China to the start of the Great Depression in the US, and when applying the 38.2 Fib retracement levels which have been breached, now expects even more pain for Chinese stocks:
In 1987 off the August 25th peak, the market declined into the October 20th low of the big crash everyone labeled as the second coming of 1929. The market declined exactly 38.2 percent, which is the Fibonacci number off that peak. And it did the same thing, if you take the March 12th high in 2000 and you project it out to the low on September 25th — September 21st, 2001, it was exactly 38.2 percent at 94.75. Both those declines were 38 percent rounding it off. And a 38 percent decline for the Shanghai market was 3200. We breached that low last week, but there were certain preconditions that had to appear. And they appear today.
So give or take another 600 point of downside for China before some possible bottom is reached, which incidentally will take us to just about the level the SHCOMP traded at for the past 4-5 years. At that point one wonders how much appetite for stocks China’s crushed retail investors will have left.
But what about the S&P500? Here is DeMark’s take:
last week we characterized the decline that we experienced and that the two big down days, we said that’s something akin to the May 2010 decline. And when we look back in 2010, it took about three, four, five days to rally, but once the market exceeded the high of the flash crash day, it was exhausted.
And that’s similar to what happened last week in the U.S. market. The market closed above last Monday’s high, which was a gap downside. And it also closed above the prior Friday’s close. And that led to exhaustion. We should see the market drift lower for the next month or so. And we could probably make a new low, the low of last week’s low, before the market finally bottoms. And that’s similar to what happened the last time.
When asked how severe the pullback may be DeMark pulls a Gartman: “We have to assess it, but if it’s a long, drawn-out process the decline won’t be as severe. But if the market does decline sharply now, it could become more severe. We did see indications at the low last week that the Russell in the small- cap and mid-cap did put in pretty good bottoms, as did the Dow Jones average.”
But the S&P and the Nasdaq did not. So we can see intraday decline probably below those broad market into the next decline, and maybe the S&P and the Nasdaq 100 making new closing lows and seeing some weakness there. So you’ll see a divergence. And that’s typical of what you would see at market turning points.
Finally, here is his answer what it would take for US stocks to see another rally: “Time. We need time. And what happened last week is just reflexive. That’s all. And it just takes time. If the market should decline faster than we expect, you will probably make a bottom quicker, but we’re heading into that period of the year when the market is susceptible to market declines September and October.”
Then again, as we said above, all it would take for everything that DeMark has predicted to be voided, is one out of place sneeze by Yellen, and watch as the entire “Combo 13 Sell” signal collapses into a handful of technical dust.