The Two Charts You Should See Before Risking a Dime in the Market in 2013

Two charts suggest a major decline is ahead in 2013.

"Don't fight the Fed," blah blah blah. Really? What did the market do after QE3 and QE4 were duly announced? It tanked.

What if the Fed is out of tricks? It's not really a question; Fed chairman Ben Bernanke said as much in his press conference. It's not clear if the Ibogaine was wearing off or just kicking in, but the Chairman had an apologetic deer-in-the-headlights look of, "Gee, we're out of tricks and I'm sorry to have to tell you what is painfully obvious to everyone who isn't stoned silly on Delusionol (tm)."

Now that the Fed's magic hat is visibly out of rabbits, there are all sorts of complexities we could hash over such as the effects of bank charge-off rates on GDP or the Theater of the Absurd "fiscal cliff" play-acting, but why waste all that time and energy when a number of charts forecast trouble for the stock market in 2013?

The first overlays bank derivatives with positive fair value against the S&P 500 (SPX), lagged 28 months.Is it cricket to lag or advance indicators? Technician Tom McClellanthinks so, as his forward-12-months eurodollar COT/SPX chart has been eerily prescient in forecasting major market moves in 2012.

Here is an article on the chart: Stocks And Euro-Dollar Futures Positioning (11/7/12)

Keeping in mind that there is no one indicator or chart that accurately forecasts market moves consistently over time, consider this overlay of bank derivatives and the SPX:

Charts courtesy of longtime correspondent B.C.

Hmm. If there is a correlation here, it doesn't look positive for equities in 2013.Those familiar with McClellan's chart know that it forecasts a serious decline in the SPX in early 2013, followed by a countertrend rally that tops in May. The decline after May is the Big One that punishes everyone who stayed long the SPX.

Next up, a long-term chart (from 1973 to the present) of the SPX, adjusted to the trade-weighted U.S. dollar. Were this basic A-B-C pattern to hold, the SPX will reverse sharply in 2013 and fall to the nearest trendline around 600, with a drop into the 300s possible. Yes, yes, I know it's "impossible" since the "Fed has the market's back," but the Fed may have to buy most of the market if it wants to keep it elevated at current levels.

As a lagniappe, there is a third pattern suggesting a major decline just ahead:Three Peaks and A Domed House Pattern Signals An End To The Bull Market.

Anyone who has studied a few charts knows that it is usually possible to torture a chart to fit the pattern one has already selected as the "likely outcome" (i.e. confirmation bias). But even with this caveat firmly in mind, 2012's SPX bears an uncanny resemblance to the classic Three Peaks and A Domed House Pattern.

Here is another analysis of three peaks and a domed house.

Could these charts be way off in their forecast? Of course. Nobody knows what the market will do tomorrow, much less next month or next year. Maybe the bulls predicting a new high in early 2013 will be proven correct. We will just have to see what happens. But as the saying has it, "Forewarned is forearmed."

Thank you, B.C., for sharing your charts with us.

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