Diary of a Financier

Extremely Oversold Stochastics & SPX Indicator Analogue to June 2011

In Capital Markets on Wed 16 May 2012 at 18:04

I recently noted the decoupling of the S&P 500 (SPX) from its 2011 analogue. Specifically, the technical indicators have diverged while the chart pattern still has a chance to maintain its course:

Referring back to my 2011 analogue, I find an inverse Head & Shoulders marking that year’s market top. Were we to maintain that analogue this year, SPX would have to bounce out of a lowly close today [May 14], with the low characterized as the “Head” of the classical H&S pattern. This would have to occur precisely tomorrow, because 2011′s outsized downward move (beyond 2-standard deviations) quickly mean-reverted to form that inverse H&S… I do not expect 2012′s market to continue tracking 2011 at this juncture. Technical Indicators have been derailed from the analogue, communicating a different sentiment and psychology among investors.

Today, I mentioned how oversold SPX is, based upon its daily stochastic.¹ After the close this evening, I spent some time looking at other extreme oversold periods in the market, hoping to find a guide with which I could formulate a base-case expectation. I wanted to see the market’s subsequent reaction a day/week/month after an extreme oversold stochastic (%K <5) reading. In my search, I found a few tight-fitting analogues, including 6/8/11 and 8/9/11. After comparing the likeness of longer fractals’ indicators, the former (June 2011) guide nominated itself as the best fit with our present positioning:

ES technical indicator analogue- bounce from oversold levels coming, not worth chasing because momentum is lower.

From the oversold low on 6/8/11, SPX naturally bounded higher, hitting resistance at the right shoulder of a H&S top, then crashing to lows amidst the Eurocrisis. That was a rangebound market from the start of the year, lending credence to technical indicators’ deterministic potential.

Today’s market differs in that we’re governed by a bear channel ever since SPX slipped below 1342 support on 5/14/12. Therefore, technicals indicators are less potent, and I’m leery in my trust of the June 2011’s potential to provide a precise playbook for the SPX day-to-day. The analogue does provide a compass for the general direction of the markets across longer time frames.

We will get a technical bounce higher tomorrow. I’ve found no exception to this rule in my study of extreme stochastics, both overbought & oversold. Plus, intraday fractals are bullish on all accounts (1-minute & 30-minute charts). As for the intermediate-term: when a market moves in a straight line lower like this, it’s a signal that the fundamentals or the valuation have changed…

These breakdowns convey a lot of valuable information. Sometimes the fundamentals have changed, altering the depth of an asset’s mooring. Other times the environment has changed, modifying the slack in an asset’s chain or the depth of the ocean (fluctuations in security-specific or systemic valuation multiples).

Europe’s rumormill has the potential to provoke a bull-trap rally at any point, but the crumbling earth² beneath their feet will demand action again… and that takes time.


¹Today’s %K=1.56, an extreme reading considering that most technical traders consider <20 oversold.

²Indications of USD funding stress in Europe again: LIBOR rising to 1.068 from 1.0475 support, nearing January 2012 highs. Eurodollar Futures (ED/) are back at 99.50 support, their last snag before entering YE2011 stress levels.

  1. […] in May 2012, I ran an analogue study regarding extremely oversold stochastics.  Specifically, I looked at rare […]


Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s