Diary of a Financier

SPX 2006 analogue: Fade the noise, join the rally

In Capital Markets on Tue 15 Jan 2013 at 22:34

For two years now, the S&P 500 (SPX) has toiled under the yoke of its indicators’ bear divergence. This bear divergence has manifest the skittish psychology that’s responsible for all the corrections along stocks’ coiling rally higher since 2009. According to the technicals, the oscillating ends this year, giving way to a parabolic launch to new highs.

Back in August 2012, I discussed the second test of SPY’s weekly bear divergence. It was an attempt at a bull reversal, but it failed [predictably] in September, and SPY corrected for the 4th time since 2009. Sequentially, these corrections have arrived with increasing frequency, but also decreasing severity. Such a coiling rally embodies a classic rising wedge, a bearish pattern I’ll keep in mind as SPY finds its first resistance at the wedge’s trendline >$151:

SPY daily

SPY daily

So, first resistance is ~3% higher than today’s close. My portfolio’s currently running with a 60% equity/33% bond allocation–light on its 60/40 benchmark, but overweight Beta at 0.81 vs. benchmark 0.76.¹ I’m comfortably positioned such that I needn’t buy into a rising market for a mere 21bps² in marginal performance. Yet, as I write I see an opportunity–a catalyst–on the horizon: a pullback this week may provide me an opening to deploy my 7% cash. Both 1-min & 30-min charts show bear divergence, priming SPY for a very quick downdraft, as confirmed (at least in the immediate term) by overbought daily & weekly charts. My entry points are as follows:

1st support @ $145.50
2nd support @ $145.00

Those supports should hold, lest SPY fill the gap down to $142.50. Not only will I buy at those supports, but I’m also a buyer on an immediate pump higher tomorrow, as it would confirm a bull reversal out of the 30-min bear divergence.

~~~~

Given all this short term noise, I haven’t yet discussed the most important development this week: I now expect a parabolic spike higher in SPX over the longer term, due largely to the bullish SPY 2006 monthly analogue. Check out the self-similarity of these monthly fractals, which governs the long-term trajectory of the priceaction:

SP 2006 v 2012 analogue (monthly)

SP 2006 v 2012 analogue (monthly)

Starting in January 2006, SPY rallied +24% over 21 months to squeak out a new alltime high. There was only one correction along the way (-7.83% starting May 2006) before a parabolic rally to the heavens ensued. Today, a similar percentage rally would take SPY up over $182–well clear of its alltime high at $157.52 (+7.25%). But, I care not to speculate on the magnitude and longevity of the forthcoming move. (Betting on capital markets’ long-term price targets is a sucker’s game, so I won’t make a conviction call as to exactly where/when this ends.) I have my near term target >$151. The rest of the picture will develop as time passes.

My confidence in the bull trend will continually remind me to fade cyclical hiccups in the market. Right now, I’m doggedly focused on accumulating more equity exposure. I’m a buyer on a pullback or a breakout this week. No action is the only bad action.

–Romeo

¹Recent purchases: IWM, BP, CLF, CSTR; Added to: GES

²Assumes 7% position with Beta of 1.00 returning 3% when $151 first resistance is met. Were SPY to pullback to $145.50, entering the same position at this lower basis would yield 26bps in performance when $151 is met.

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