Diary of a Financier

Short term sell signals

In Capital Markets on Mon 11 Feb 2013 at 20:23

All my bullishness needs to be tempered at some point… and this is that point.  I’m a high-conviction intermediate to long term bull.  That doesn’t mean SPX won’t face short term oscillations.  In fact, going back to 1995, SPX didn’t make it through a single year without at least a 7% decline.  (Most years were more in the order of 14-20% intrayear drops.)  While a lot goes into the stew, two technical developments have me prepared for a short term pullback of 2½-4% over 2-4 weeks.

First, SPY’s daily chart shows me that it has reached major trendline resistance of its long term bull channel, the primary pattern that’s governed equities for just about 3 years now.  That’s been my target, and I’m sticking to it.  I also notice MACD (momentum) still stuck under the yoke of bear divergence, whereas the daily stochastic and MFI have managed to breakout.  MFI in particular shows buyers playing catchup to the rally, so [as poor an attribution as this sounds] SPY may need to regroup before making an assault on its long term demons:

SPY daily- at resistance of LT bull channel

SPY daily- at resistance of LT bull channel

Second, I turn to the 2006 SPX analogue, where I find that not only the weekly charts are perfectly coordinated, but now the daily fractals are too.¹  A slight recalibration plops SPY’s analogue back at 12/5/2005, whereafter a failed breakout through a double top pulled back -2.6% before the rally resumed:

SPY 06 v 13 (daily)- in short term, failed breakout at double top pulls back -2.6% before resuming rally

SPY 06 v 13 (daily)- in short term, failed breakout at double top pulls back -2.6% before resuming rally

Finally, I’m making sure to keep the longer term inertia of this market in mind.  Per the 2006 analogue, SPX will grind out ~4.5% upside between now and July/August (5-6 months).  That will bring us to the doorstep of 2013’s real correction, a 7.5% slide over 3 months, which should set the table for a parabolic rally to unforeseen new highs:

SPY 06 v 13 (weekly)- from today, ~4.5% upside over 5-6 months remains before correction

SPY 06 v 13 (weekly)- from today, ~4.5% upside over 5-6 months remains before correction

In preparation for this short term downside, I don’t want to sell out too early; in fact, I don’t want to sell out at all.  A base case -2.6% pause is peanuts in the grand scheme, and an immediate breakout through the current resistance levels would be powerful enough to warrant patience.  What I want to do is trim exposure, and I’ll accomplish that by shedding some Small Cap (IWM) and R3k (VTI) index positions.  I’ll wait to do so until SPY breaks down under that short term bull channel it’s maintained since just before Thanksgiving 2012.  At very least, I expect to reengage those positions upon a pullback.

After this, stocks ascend into la la land.  Technical indicators won’t work quite right, especially in longer term (weekly/monthly) fractals.  Stochastics will start bull reversing in the middle of their bands–without even grazing oversold territory.  That’s just a bull market–the inextricable power of momentum.  That’s why I’m a multidisciplined investor.  In this case, I’m looking at history to guide me forward, because otherwise, the blunt technicals would lead me astray.

–Romeo

¹When I first observed the 2006 analogue not more than a month ago, the comparison was only consistant in its monthly fractal.

N.B.- Some readers may question this cautious [short term] posture, especially in light of my recent Quant Study, which recommended buying SPY after observing extremely overbought conditions like today’s.  As I said upon reporting the results, the study’s sweet spots were really anything other than the short term:

“1 week is the only holding period over which I’d question the significance of the conditional results, for which the average (mean) actually underperforms the control group by a slight margin (+0.17% vs 0.19), although the median outperforms (+0.36% vs 0.30). These 1 week results lack significance, in my opinion, due to the distributions’ large standard deviations, as expected of shorter time periods.”

Advertisements
  1. […] haven’t commented on SPX since I turned short term bullish two weeks ago. Since then, markets floated higher for a week before rolling off […]

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