Diary of a Financier

The 2007 Analogue’s Warning: New Highs in the Long Term Lead to a Meaningful Correction

In Capital Markets on Mon 29 Oct 2012 at 08:50

In my latest weekend update, I envisioned an intermediate-term bottoming process in broad markets like QQQ & SPY. A bottoming in weekly technical indicators–particularly the QQQ’s stochastic–will be my first buy signal. Of course, I had to ask myself about the setup in longer-term fractals like the monthly charts. To wit, I’m watching a longer-term analogue develop in these monthly charts, and I see a precedent for a meaningful correction in 2013 at the end of this cyclical bull trend.

First, I notice resilient stochastics hovering around overbought levels in the monthly charts–as is characteristic of cyclical bull markets. Take the NASDAQ (COMPQ) for example. I have to wonder when the rally will quit, when these stochastics will breakdown:

COMPQ monthly- periods of persistent stochastics.

So, I look back at other indices’ monthly charts to see how indicators and pricetrends behaved just before cyclical bulls ended. I notice 2007’s COMPQ market top showing a fractal self-similarity to today’s index. This may serve as a suitable guide henceforth:

COMPQ 2007 v 2012 analogue (daily)

This analogue suggests that we won’t just see a recovery from our correction off the recent Head & Shoulders top, but COMPQ will also launch to new highs at a new, steeper pitch. Once the weekly fractal’s stochastic reaches overbought territory, I’ll have my trigger to sell.

–Romeo

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