Diary of a Financier

Chart Update: SPX False Bottom (but Silver’s Is for Real… for Now)

In Capital Markets on Wed 6 Jun 2012 at 17:55

SPX enjoyed a ferocious rip-your-face-off rally today, ending +2.30% with a real blowoff surge into the close (SPY VWAP only +1.62%). Since markets have been loopy lately a la 3q11, my web presence has been confined to StockTwits, where I try to condense my thoughts into little quips. I’m going to use this entry to explore some of my recent notes at greater length. The consensus remains bearish, although this rally has enabled at least one bull to join every conversation on the Street. The question “have we seen the bottom” naturally gets voiced, so that’s part of what I wanted to address.

Let me unfurl some of my recent StockTwits:

  • $SI_F much like $GC_F in a bear channel since 2011 top, but double bottom has formed a H&S neckline, signaled bull reversal. $SLV
    June 5 @ 9:29am
  • “V” shaped bottom (or top) is rare, as it plays into bear flag. Classical patterns are H&S, rounded, or double bottoms. $SPY $DIA
    June 6 @ 1:07pm
  • …$ES_F best case: rally to inverted H&S neckline at 1333 then down to 1290 rt shoulder support before breakout higher. $SPX
    June 6 @ 1:24pm
  • …$ES_F base case: after hitting trendline resistance ~1315, resume slide to 1254 support, then breakout higher fm this falling wedge. $SPX
    June 6 @ 1:28pm

This string actually provides a good launchpad for this conversation. It’s also a pretty good sample of my global macro, multi-asset, multi-disciplined approach. The first thing I noticed before yesterday’s open was the double-bottom support achieved in Silver (SI/), which formed a tidy Head & Shoulders neckline. That opens the door to an SI ramp up to a right shoulder at $35, almost a 25% pop:

SI daily- double bottom sets up H&S within bear channel, but that’s trumped by larger bear descending triangle ($26 support).

Silver’s your high-Beta hedge against central bank intervention. It trades almost like a leveraged derivative of Gold, a hypersensitive barometer of risk. With European central banks (as distinct from the ECB) and/or Fed action a near guarantee in June, it’s not inconceivable that $35 could be achieved in weeks or a month. However, I expect SI to flop from trendline resistance <$32, part of a larger bear descending triangle. Nevertheless, intraday fractals gave me confidence in a proximate, short-term rally. Once I noticed this, I started accumulating a position in the Silver ETF (SLV), alongside my preexisting GLD stake. I’ve been overweight cash for some time now, having reduced the equity allocation to pebbles when I sold the last of my Beta in early May. I bought index exposure to the Utilities ETF (XLU), then some Consumer Staples (XLP), and finally the Euro ETF (FXE) most recently. Overall, SLV fit nicely into the portfolio to help my otherwise conservative positioning still catch some Beta in a short-term rally.

Until today, I had lost any & all comfort with the flow of SPX after it plunged lower out of a telegraphed bear flag on May 30. As usual, equities were acting like the last asset class in on the secret. They’ve been the odd-man out for a few months there. As I was buying SLV, I did notice a report that hedge funds’ equity net shorts had doubled since mid-May. Add that to the record net Euro FX shorts I pointed out last week, and risk-assets were primed for a snap-back. Today’s bounce provided such a development. In advance, SLV was all the daring I could handle, a sober proxy for a belligerent SPX. I always plan on buying Beta-driven singlenames to aid defensive incumbents when I identify a bottom. I just didn’t see a bottom here, and I still don’t.

To wit, my StockTwits above talked a bit about the formation of bottoms (and tops). Bottoms never take the form of a “V.” V-shaped bounces often end in bear flag patterns, which retrace the move back to the bottom. My studies of charts & classical patterns show three major categories of bottoms:

  1. Inverse Head & Shoulders
  2. Double Bottom (or Triple/Quad)
  3. Rounded Bottom

Apparently the Head & Shoulders bottom is all the rage these days, as I can count 3 of them since 2008–all marking the bottom of the last 3 major corrections:

ES daily- correction H&S bottoms since 2008.

It’s worth noting the H&S that broke-down and failed in June 2008. It’s a false negative in my sample that marked the occasion of an exogenous shock, Lehman Brothers, stoking a relapse after Bear Sterns’ mess had been averted. Today’s market is in early-stage development, and it could emerge much like the H&S bottoms preceding it. As the aforementioned StockTwits note, such a bottom is my best-case scenario. My base-case calls for an eventual slide to 1254 before SPX rallies out of a bull falling wedge.

The weekly fractal provides more insight than usual in helping me arrive at a conclusion. Using those 3 other H&S bottoms as analogues, this market’s weekly stochastic should have double-bottomed by now. In addition, I’d expect momentum (MACD) and buyer’s interest (MFI) to express earnest capitulation before recovering:

ES weekly & monthly- while every analogue’s stochastic had troughed by this point, they had double bottomed too; MACD & MFI don’t express patent capitulation today either.

I don’t think this was our bottom. However, the promise of [inevitable] central bank intervention should maintain the bid beneath precious metals for now, while policymakers’ incompetent implementation should provide equities ample opportunity to continue recoupling with every other asset class. This remains my base-case, as it has been for a while now:

Because the Eurocrisis is a Grey Swan, I don’t expect a return to that SPX 1200-1100 panic range, which had effectively discounted all of SPX’s sales in Europe (20% of revenues). If there’s slippage lower toward final support at 1254 (resistance of the Eurocrisis 3q11 trading range), I’ll begin buying natural resource names that trade with good value, below net asset value.

Objectively, tomorrow’s closing price is perhaps the biggest print of 2012: a close materially above 1315 would have SPX tracking a H&S bottom; failure to breach that trendline resistance on a closing basis would relegate SPX to resume its correction in a falling wedge, with a 1254 target before a bull breakout.

–Romeo

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  1. […] accordance with my analysis of market bottoms earlier this month, I still see the S&P 500 (SPX) in an inverted Head & Shoulders […]

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