Diary of a Financier

SPX Weekend Update: Testing the Secular Bear

In Capital Markets on Fri 17 Aug 2012 at 19:12

As far as I’m concerned, this was one of the biggest trading weeks of the year.

Last week, I offered a binary outcome: “Either underperforming managers start buying or SPX will retreat to its support levels.” Well, things got scary at the beginning of the week, when SPY traded down to trendline support of its short-term symmetrical wedge (green). After bouncing around those confines, it breached its ceiling and managed to trade along former resistance as support throughout mid-week. Then came Thursday, when stocks broke-out:

SPY 30-min

SPY has left its symmetrical wedge in the dust. It’s now riding that rising wedge (blue) as support. More importantly, I take a step back to the daily chart, where I notice MFI starting to breakout. This was the last piece that didn’t fit: MFI bear divergence had worried me for the past few weeks, but the buyers have stepped-up, backing this rally with their volume:

SPY daily- MFI finally broke-out, assuaging fears of bear divergence.

Don’t get me wrong, volume is still weak, but anxious buyers arrived just-in-time. Critical save. Now that SPY has achieved a 100% retracement back to highs (red), I expect it to respect trendline resistance of its bull channel (yellow). Next week should test the lower support of SPY’s rising wedge (blue), so we’ll see how we’re positioned mid-week before making any tactical moves.

For the longer-term, I’m happy to see the development underway in the weekly fractal, where this rally is starting to reverse the bear divergence in indicators. In short time, we’ll have confirmation of such bull reversal. Further, the same is occurring in the monthly chart, where SPY is trying to break-through resistance of the secular bear market’s channel:

SPY daily/weekly/monthly- recent rally is eradicating weekly bear divergence and testing the secular bear’s resistance as seen in monthly.

This was a huge week.

~~~~

Week-end closing prices (4:00 est):

SPX= 1418.16
ES/= 1415.25

–Romeo

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  1. I like how you reduce market behavior to trendlines and such. I watch the markets daily, minute by minute. I only look a price and volume. But I got the same feeling last week. It way a critical moment. And the market managed to go higher. It will probably go down as it hits alltime highs. But it seems like it will move to all time highs. Maybe this fall. Everybody talks about the catastrophic trouble ahead, in the Euro and in the US with the fiscal cliff, etc. But up we go…..

    ghickey

    • Yes, I find the investors’ behavior in the charts, which often yield repeatable patterns. I apply quantitative methods to arrive at my security selection, technicals for timing, and a macro overlay to manage tail risk. It’s an exercise that helps me strip-away my biases, as influenced by the fallibility of prevailing consensus and irrationality.

      To each his own though. Your system has to fit your personality, and there are a lot of functional ways to trade/invest.

      You’re right here. Crazy trading pattern that week. The short-term is very important in shaping the longer-term thrust of this market. I know you don’t use indicators, but mine show bear divergence that could prevail were this market to consolidate or roll-over I’m the coming weeks. Quite a binary outcome being wagered as we speak.

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