Diary of a Financier

2007 analogue update: Base case bottom spotting

In Capital Markets on Wed 5 Jun 2013 at 23:50

Despite yesterday’s valiant attempt to rescue this market from a correction, $SPY epically failed to follow-through and confirm a bull reversal today. The 2007 analogue continues to prove itself a worthy guide to the market, so I wanted to update the charts and try to establish a base case for bottom formation.

First, some background. Broad equity indices cascaded lower throughout the trading day, all closing at lows -1.4 to -1.6%. Market overview (2013.06.05)Even much of the bond complex got crushed, with $AGG in the red and $HYG -0.87%; only the long end of the Treasury curve closed meaningfully in the black.

SPY did close with nice 1x bull divergence in its 15-min chart, not to mention extremely oversold according to all intraday fractals, so I expect some retracement of today’s late day slide in tomorrow’s session, but it’s not a tradable bounce for my style.

Next, revisiting the 2007 analogue, here’s a wide view of the weekly comparison–a self similar fractal that continues to lure me to its likeness:

SPY 2007 v 13  analogue (weekly)

SPY 2007 v 13 analogue (weekly)

Finally, the daily comparison of 2007’s market to today’s is coming more into focus. This had previously agitated me, since I couldn’t trust the misaligned daily indicators. I still notice subtle asymmetries in indicators like momentum (MACD) and buyer’s interest (MFI), both discrepancies due to the homogeneity of today’s low-volatility pricetrend compared to 2007’s. Generating a spike in indicators, there’s also that spaceshot of a last leg to today’s trend, with which steepness 2007 can’t compete. Yet, the whole package is coming closer into alignment:

SPY 2007 v 13 analogue (daily)

SPY 2007 v 13 analogue (daily)

2007’s correction found support right at its 38.2% Fibonacci retracement level, which today would mark $156 as the downside target–another 3.25% below today’s close for a full 7.73% peak-to-trough drawdown. That’s where I envision the bottom, albeit far tamer than the 11.25% correction met in 2007.  Best case–and grounds for nibbling–would be a shallower bottom ~$160 when the daily stochastic brushes just above 10 (%K), per the analogue again.

–Romeo

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  1. Updates…

  2. […] I fully expected this drawdown, I expected a deeper correction, with my base case bottom target for SPY ~$156 (-7.7% drawdown) and a best […]

  3. […] bull flag that had developed over the last 1½ months with bull divergence, or SPY slides to $156 support in a -7.7% total drawdown before a technical bounce. The former would of course be more sustainable […]

  4. […] bull flag that had developed over the last 1½ months with bull divergence, or SPY slides to $156 support in a -7.7% total drawdown before a technical […]

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