Diary of a Financier

SPX After Hours Update: Epic Fail

In Capital Markets on Thu 8 Nov 2012 at 18:51

Well that sucked. SPX cascaded lower into the close, -1.22% after a -2% day yesterday, so I wanted to blurt out my reaction. (More to come once I analyze later tonight.)

I noticed two instances of bull divergence intraday. Both signals came from the uber-short term 1-minute chart, and both ended up fading quickly after mere 20-25 bp rallies weren’t backstopped by longer term fractals. The lack of followthrough in the 15 & 30-minute charts kept me from buying today’s slide at support. (For example, I noted the first 1-min bull divergence which showed promise due to a developing bull divergence in the 15-min. The latter never achieved confirmation, and the trading day really started to unravel thereafter.)

Like I discussed as recently as yesterday, I’d been sitting on a lot of cash since October, so I started nibbling on index exposure in the Q’s & R3k per the recommendation of some analogues. This wasn’t the conviction bottom call I made in 4q12 and again in June this year. I was sure to disclaim the market’s fragility:

What really worries me is a potential complex Head & Shoulders top developing in SPY, which broke beneath $140 neckline support and closed there. It’s a weak pattern–not as pronounced or robust as a classical formation–but it’s nonetheless my null hypothesis, and it’s going to nag me… I’m not married to my call for this being an approximate low in a H&S bottom. I’ll be quick to change my mind if new evidence arises… and it won’t be too long until we get a verdict, because SPY’s intraday low scraped trendline support of a long term rising wedge. A breakdown would hit a big air pocket (at least 50% retracement)… technical indicators require three bumps of a divergence trendline before confirming a reversal, and SPX’s daily & weekly charts have indeed tested divergence thrice. As the longer term pattern in play right now, the rising wedge will determine the outcome, and it really all depends in whether or not its trendline support survives this week.

Nary 24 hours later, that worst case scenario quickly asserted itself. SPY’s daily chart broke below that rising wedge after fighting to hold that level all morning. After breaking even lower through its 200DMA, SPY closed right upon its 50% Fibonacci retracement level:

SPY daily- breakdown below LT rising wedge; resting on 50% Fibonacci support.

For the 2q12 analogue to reassert itself (a bullish development), SPY would have to recapture $140 tomorrow. Otherwise, I’m sitting on my hands, not buying until the weekly stochastic bottoms with SPY around 2nd support:

  • 1st support- $137.70 (50% Fibonacci)
  • 2nd support- $135.24 (61.8% Fibonacci)

I’ll start buying again in the $135s, and I’ll buy with both hands if we reach $130 (100% retracement), at which level SPY would hammer out a neckline, rally up to ~$142, then crash hard in 2013 from that right shoulder resistance of a long term Head & Shoulders top. With that in mind, I’m tracking the 2007 analogue (bearish), while being careful not to resort to biases and data mining:

SPY 2007 v 2012 analogue

–Romeo

Advertisements
  1. […] yielded either an 8% rally or a 15% rally, respectively.  Recent developments have me leaning [even more] conclusively toward the 2007 […]

Comment

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 )

Twitter picture

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

Facebook photo

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

Google+ photo

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

Connecting to %s