Diary of a Financier

Lesson Learned As SPX 2007 Analogue Moseys Along

In Capital Markets on Wed 28 Nov 2012 at 00:38

Unfortunately, I bought some more of the S&P 500 ETF (SPY) this morning, my first purchase since those when the bottoming process began two weeks ago. That’s unfortunate because the market flipped from green to red intraday, closing at lows by the end of today’s session. Here are my thoughts for this Diary…

Something a historian-cum-technician always has worry about is his analogue going stale. When I’m lucky enough to have a historical guide as neat as a chart analogue, I always get anxious about a correlation breakdown. As was the case most recently–when SPY departed from its 2q12 likeness and recoupled with 2007–I try to catch a chart pattern early in the process of derailment from its analogue.

Today, I let my psychology get the best of me. The portfolio came into the trading day equal weight with its benchmark (SPX Beta ~0.76), which follows a period of tight defense since the market topped in September (57% downside capture peak to trough). To get back to benchmark, I had accumulated equity exposure in QQQ, VTI, SPY, TIVO, and Weyerhaeuser (WY) between the day of SPX’s capitulation–marked by a dark candle I had been awaiting–and the actual bottom. I saw an attempt to rally this morning, and I chose to chase, hastened by the analogue’s inevitable trend higher. I didn’t want to squander a heretofore “beat” on the market, especially since I only expect that another [fleeting] 2-6% upside remains, per SPY’s resistance levels:

  • 1st Resistance- $142.20-$143.30 (+1.25-2.25%), which respectively represent traditional right shoulder resistance & 23.6% Fibonacci resistance
  • 2nd Resistance- $148 (+5.5%), which is the 52-week high

What I saw was a two day Cup & Handle in its early stages of development on intraday charts (bullish). In addition, a weak bear divergence¹ lay latent in 15 & 30-minute fractals. Presented with the juxtaposition, I voted in favor of what I perceived to be the higher probability outcome: a launch higher per the bullish pattern setup. Note that this conveniently (!?) placated my aforementioned performance anxiety, which psychological pitfall is the impetus of this masochistic entry.

Lo and behold, I was wrong and lost 48 bps on the SPY accumulation (today’s shares alone). No panic here, just acknowledging my state of mind and trying to learn from it.

I consciously ignored the analogue’s warning of this pullback, because I try to avoid micro-managing my portfolio down to daily undulations in an analogue. I always put more weight on the current market’s short-term fractals, rather than meticulously tracking the day-to-day flutters of yesteryear’s analogue. That being said, my lesson today is to have minded the analogue (as a tiebreaker) given the juxtaposition displayed in intraday fractals.

~~~~

The 2007 analogue suggests we’re in the middle of a brief pullback now–around 3 days’ worth of retrenchment that will end mid-week:

SPY 2007 v 2012 analogue (daily)- brief pullback (~3 days) will yield to continuation in the rally up to R shoulder resistance of H&S top.

Now, not only the daily, but also the weekly fractal have recently aligned. This resurgence of self-similarity in indicators particularly fortifies my confidence in the 2007 v. 2012 comparison:

SPY 2007 v 2012 analogue (weekly)- lookout for George Lindsay’s Three Peaks & a Domed House; a H&S top nonetheless.

Again, this week’s pullback is immaterial in the grand scheme of things… but that doesn’t mean I can’t learn from a trade’s bad entry point.

–Romeo

¹SPY’s 15/30-min bear divergence was weak for a few reasons. To start, it warned of a reversal from stronger, bullish daily & weekly trends. Since indicators had only diverged once (i.e. two peaks not confirming a higher high), it was too premature to trade on the warning. Plus, the two peaks were barely staggered, which is hardly enough to inspire conviction–even despite the pricetrend’s uncoordinated spike.

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