The monthly analysis is really big picture stuff - the weekly starts to bring things more into focus. Not so much that we can make an intraday decision, but certainly a needed view for any swing position lasting days or weeks. When you compare the price line on a weekly to the monthly, you start to see a rhythm to the price movement - even if it is a bit syncopated.
Again, open the chart in a separate window and allow me to orient you to the key chart features:
1. This is a weekly LINE chart for the last three years
2. The 20, 50, and 200 period moving averages are labeled and lightly fatter than the other lines to allow for easy identification
3. I have included bollinger bands in grey. These bands are based on the classic 5 periods - not 6 periods as I did in the monthly.
4. I have included a 5p MA which is essentially the center line of the bollinger bands. Remember, price action will tend towards upper and lower bands crossing OR bouncing off the center line.
5. I have added a fib grid for the CLOSING price action and the CENTER fib line.
6. I added a fib fan which spans from the high of October to the first local bottom in the major down leg. The fan is useful as it projects the attitude of the down turn and provides an indication of where natural support and resistance will occur.
7. Finally, there are yellow trend lines that following the 5p MA from the start of the major down trend in October through the tops of major intermediate swings. The top line is very close to current price action. Also, a second trend line follows the lows of the most recent up leg that started in March. Note it also is very close to current price action.
I will be working on analysis later tonight and tomorrow - but you should immediately note several fundamental differences in the charts features when compared to the monthly. Absorb those differences and try to make sense of them in the context of your thesis AND outside your thesis.
The first thing I notice about the weekly chart is that the 200p MA is moving down and price action is trading below the line. This indicates that in this time frame, we are technically in a bear phase. At the same time, we see some bull indicators, including the rising 20p MA that has pierced up through a flattening 50p MA. Also, price action has been above the 20p MA since the end of March. When measured on whole, the MAs suggest that the market is making a major decision and Price action during the next several weeks will determine if the 20p MA does an about-face or continues a run to the 200p MA. To assess which is more likely, we need to analyze the efforts of each move.
Starting with the bear case - price action has been riding above the 20pMA for almost 6 months. Since crossing, it has not once regressed back to touch or cross the average. Further, price action crossed the 50p MA and has not regressed to that line either. One argument is that a regression to the MA's is over-due and price action can be expected to at least touch the 20p MA soon. Currently the 20pMA is around 960 - and rising. Looking at past regressions, the price action drops relatively quickly and the action of the MA lags - so a 960 target is probably fair.
The bull case seems a little more challenging. Price action would need to carry the 20p MA from 960 to roughly 1200 over the next several months. That means that the S&P price line would need to reach closer to 1350 (as the MA lags) and would be trading at higher than any published target for 2010 and above 35X the projected S&P earnings. That would be 2X greater than the PE ration at the top of the biggest bull market in history. I think that is a tall order for the first half of 2010.
The next thing I will look at are technical levels of resistance and support for the price action in the near term. Open the following magnified chart view.
Again we see the trouble zone - but this time with a little more detail.
Price action (based on the closing values) is in blue. We know that the MA analysis suggests that either we regress to the 20p MA (in pink) or we make a run to the 200p MA (in white). What are the obstacles.
1. We note that price action was just firmly rejected at the top BB. The result is price action reversing and the BBs opening up. This signals volatility is about to kick in.
2. We note that the rejection of price action at the top BB also intersects with the down trend line of the 5p MA highs.
3. We also note that the top blade of the fib fan aligns perfectly with both the down trend line of the 5p MA and the top BB.
These strong forces are likely responsible for the hard rejection we saw this past week. There seems to be a lot of program selling at this intersection.
Looking at price action right now, we see that it intersects with the 5p MA line (white). There are only two possible outcomes - it will either cross down through the line or bounce up. Chances favor a cross down - as this is all occurring at roughly the 38% retracement level of the major down leg. Note the white and pink horizontal lines - these are the 38% retracement levels for the 5p MA and actual closing price respectively.
At major retracement levels such as this, at a minimum, we can expect to see some sideways consolidation. The top trend line, fib fan blade, reversing price action and draw of the distance 20p MA almost guarantee sideways movement.
Now let's take that further. If we begin to move sideways, we will eventually run into the yellow up trend line formed from the lows of the 6 month rally. This trend line sits above the lower BB - which is currently expanding downward. If price crosses the trend line (even if it is moving sideways) it is considered a break down, and program trading will kick in and result in selling pressure. The draw of the lower BB will add gravity to the downward thrust. Additionally, this will mark a significant break below the 38% retracement levels and the psychological 1000 level. We could very well see extended selling a that point and price action would now be headed firmly back towards the 20p and 50p MAs.
So heading down, the support levels seem to be 1044 (our current level and the 38% retracement level of the 5p MA), 1020-1019 (the 5p MA up trend line and the 38% retracement of the closing price line), 990ish (bottom BB), and then 960ish (20pMA). Below these levels and we have to look at the middle fan blade in the low 920s and the 50pMA in the high 800's. I will point out that the 10yr monthly chart shows 920 as the 38% retracement level for this 6 month rally. Coincidently, 920 matches very nicely with the middle fan blade on the weekly and the eventual location of the 50p MA. Always pay special attention to support and resistance levels that converge in three dimension time studies.
Heading up, we would need to see price action reverse and break the upper down trend line in around 1060's. If we do, we will see a retest of the 1080s intraday high and an eventual run at the 50% retracement levels in the 1120 -1140 range.
12 comments:
If this is similar to May 08 I think we can expect a lot of conflict between bulls and bears in this range. Could be an opp for swing trades each way. I'd have to think that if we haven't topped out we are close to it, but I just don't think we are at a point where the bottom just falls out. Right this second i'm not too worried about it one way or the other because I am flat!
In the end, though, most TA is bunk. There is some truth to the conception that there is some serial correlation to the moves in the market, so trend following has some basis for giving one an advantage. etc. (so, I'd like to take advantage of expected choppiness in the near term but catch on to an expected trend to the downside I'm expecting to resume very shortly.)
http://pragcap.com/how-the-government-run-rally-morphed-into-the-bank-run-rally
David , Do I see an inverted head and shoulders over the last year and a bit , pointing to about 1280
Still trying to take it all in :)
Thanks David
Kph , thanks for the link , nothing there e didnt know , but its nice to hear someone else say it
Hey KPH,
I think your assesment is correct - meaning we are in a "trouble zone" where many points of technical resistance are apparent and there is now a bull-bear conflict underway. The ultimate direction of the market is in the balance.
I too am not convinced that a new low is likely. However, the possibility does exist - or at least can be rationalized from a technical standpoint.
It is at that this point we lift our heads temporarily from the TA and contemplate the fundamentals and sentiment under a variety of "what if" scenarios underway. Intuition takes the wheel a bit and guides based upon available knowledge. Unfortunately, there is far too much knowledge for any of us to know! And hence the theory that there is no better judge of knowledge than the market itself - which ultimately relects knowledge gaps between participants in the form of price action.
TA is just one set of tools to "model" these market reflections. Interpreting the reflections is an art as much as it is a science.
I am interested more about your thoughts on credit risks. I will re-read your comments in the prior thread before hitting the sack.
Thanks for your comments.
Hey Payline,
Yes, the head and shoulders formation has been discussed by many. The pattern is commonly associated with major reversals - though statistically, it is almost a 50-50 gamble. The real benefit of the pattern is that you have a fairly good change of trading the foreshadowed range of the head and last shoulder of the pattern.
Looking forward to more of your thoughts.
Wish I were able to continue much more tonight - but the Chiante Reserva has nuetralized my amibition!
I'm looking foward to the rest of your analysis. I'm more of a fan of TA than manipulation hypotheses. The only real manipulation I see is the incessant printing presses. The latter may "save" us or be the final straw on the back of all our frivolous spending as a people and government.
Credit risk information, from Denninger (who seems to be a bit of a nut but who seems to understand the fundamental problems quite well):
http://market-ticker.denninger.net/archives/1465-HR1207-Audit-The-Fed.html
http://market-ticker.denninger.net/archives/2009/09/21.html
So, the risk is still out there. The question is whether we are going to get to another point in the near term where the bottom falls out of the credit market and the risk becomes extreme that we can't pay. This will come eventually unless we gradually pay off debt. The US will likely do this and morph into a different type of economy.
Good morning Attitute,
Trying to get some cycles on this today - did a brief update to the weekly chart analysis to include a dicussion of thwe MAs. I also modified the chart to include a fib fan.
Today is another hectic day with some travel in the mix. May be later tonight before a finish the weekly and post the initial daily.
I appreciate your comments - and theoretically speaking, manipulation is baked into the price action so it is not worth thinking about! TA is cold and calulating, liberating the analyst from emotion and second guessing. That does not make it right all the time, but provides enough discipline to make good decisions with know limits to risk.
Cheers.
Thanks for the links KPH!
Attitude, it definitely makes sense to pay attention to more than one thing. Obviously any sort of manipulation can only do so much and can only last so long because at the end of the day the market will do what it wants to do. Personally I am trying to figure out my next step given the vagaries of the market. By the way, I like your blog too. I'm the guy from Atlanta, Bobby Jones!
Well, I am quite interested in seeing what happens tomorrow. The only reason I would think of going long these days is because of the belief that others think that TA has validity (and of course all the cash floating around). I actually believe fairly strongly that we are eventually going to go down pretty hard as the country chokes on debt. I'm just not sure if it is going to happen today. painful to wait and try to figure it out, but I think that is what I am gonna do. Maybe.
Hey KPH,
As I am finishing up my analysis, I took a look at some other important indicators. Specically, I looked at the put/call ratio on the monthly chart - it is at the lowest level since the the bull market highs of 2007. This is a contrarian indicator - meaning the lower the index, the greater the chances of a down leg. In other words, there is a very calm and care-free sentiment out there despite the technical warning signs.
Also, this past week marks the first time since the start of the rally that the fast stoch crossed down through the slow stoch while in over-bought territory. Never once has this occured without a price correction in the following month. The corrections tend to be in the 3% - 7% when they are not associated with a local top, and much more severe when they happen at a local top.
Who knows what to expect - we are all speculators!
Post a Comment