Diary of a Financier

SPX Tightly Tracking 2Q12 Analogue: Please Not Another Head & Shoulders Top

In Capital Markets on Thu 20 Sep 2012 at 22:41

Last week, I acknowledged the reemergence of the S&P 500’s (SPX) analogue to the 2nd quarter 2012:

“I notice the reemergence of the 2011 analogue over a week ago (now the January 2012 analogue). This continues to serve as a prescient guide, and it happens to suggest that only 1.5% upside remains in this rally.”

SPX continues to track the analogue tightly, having formed a rounded top here over the past week. Much like the analogue, I notice that SPY is above a resistance-cum-support level ~$142.20, drawn from the 4/2/12 high (red dotted line). That suggests we may burst up to new highs, at which I may liquidate high-beta, risk-on assets. I hate to be so procyclical (as we’re in a risk-off spell lately), but that new high should establish a “head” for what can develop into a Head & Shoulders top:

SPY daily- analogue to 2q12.

Since 2009’s collapse, the SPX priceaction has been remarkably self-similar–fractal by definition. I’ve observed before that every subsequent market cycle seems to have halved the longevity of its predecessor…

Bull cycles within the secular bear market:

  • 3/31/00 through 10/12/07- 79 months
  • through 4/23/10- 30 months
  • through 5/6/11- 13 months
  • through 3/30/12- 10 months

As nice as that pattern is for a perceptive money manager, it’s inconvenient for policymakers, who are trying to fight nature (read: QE) and render stable, sustainable economic conditions. Again, I don’t want to be too procyclical; I want to govern my emotions and remain objective despite the prevailing sentiment of my surroundings. There’s a reason for my lack of conviction week-to-week this month. The long-term SPY charts show how we’re teetering between bull and bear. On one hand, equities have a chance to slay the secular bear market; on the other, equities are governed by an analogue that warns of another correction:

SPY daily/weekly/monthly- analogue to 2q12 is evident in all fractals, and bear divergence looms large.

Normally, I’d expect a reversal out of a bear market like this to be preceded by bull divergence. In a perfect world, that bull divergence would materialize in longer-term fractals. This isn’t a perfect world though–there’s actually bear divergence still looming in the daily & weekly charts.

–Romeo

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  1. […] a Head & Shoulders top developing in the S&P 500 (SPX) a week ago.  At that time, I thought we were in the early stages—still forming the left shoulder: “[W]e may burst up to new highs, […]

  2. […] S&P 500 (SPX) has continued to follow the 2q12 analogue since my last update.  To be sure, a tilted Head & Shoulders top has not materialized as expected, but the […]

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