Diary of a Financier

SPX update: Focus turns to short term resistance

In Capital Markets on Tue 9 Jul 2013 at 22:42

After a brief setback to start last week, $SPY resumed its ascent, filling up the 6/20 gap to >$163.5. As I mentioned earlier today, my short term focus has turned to nearby resistance in $SPY, but the longer term remains bullish, more importantly. In other words, I’ll try not to sweat this small stuff, but I do want to report what I see.

The 15-minute fractal shows a couple overhead roadblocks, which are fortified by an immature Head & Shoulders pattern. In the 15-min chart, the convergence of a trendline and traditional resistance at the current $165.25 level may explain the restraint of today’s intraday market. That may prove an immediate hindrance, validating the 1x bear divergence in indicators. We’ll find out tomorrow whether or not that will be the case; futures are higher as of print. If not, overhead $166 resistance is another test, though less formidable considering how indicators would progress into bull reversal. Both that $165.25 and $166 levels are potential necklines to a Head & Shoulders bottom. Were either to prevail, I’d have major concerns about a slip lower to right shoulder support ~$160.3:

SPY 15-min

SPY 15-min

The likelihood of such a H&S bottom maturation is compounded unanimously by recent, historical precedents, wherein all four of the major corrections in this cyclical bull market have reversed out of H&S bottoms:

SPY daily- correction bottom patterns since 2010

SPY daily- correction bottom patterns since 2010

In my experience, it’s folly to put the cart in front of the horse by preemptively acting upon extrapolated technical patterns like this—particularly one that’s so young in its maturation process. Plus, I’m outspokenly confident that the longer term trend is higher, as a daily classic bull flag is the primary pattern at work here. Here’s a look at the longer term fractals:

SPY daily/weekly/monthly

SPY daily/weekly/monthly

I’ll wait for a confirmation that the trend is really captivated by the pattern, before reacting with portfolio adjustments. Were the pullback to occur as envisioned, base case is for a 3% drawdown to right shoulder support. Given my longview, the prospect of raising cash here is an alpha opportunity, not risk management, because there is no danger of permanent, chronic, or prolonged principal loss. Thus, I don’t want to risk missing upside beta unless I’m certain of the alpha; that’s just prudent portfolio management.

Our allocation remains heavy-handed on the risk exposures with 71/28/1% (stocks/bonds/cash); beta is around 0.95 vs 0.76 benchmark; sigma 1.52 vs 0.82 benchmark. As proposed in my last equity market musing, I followed through with purchases of new positions in $FXCM, $USO, $KRE, and $VRX to get here.

–Romeo

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  1. Updates…
    7/10- $SPY moves sideways along that trendline resistance <$165.25
    7/11- ST H&S threat evaded by exogenous intervention: Ben Bernanke's comments during Q&A (after his speech) at a NBER event provoke rising tide rally across global asset classes; FOMC June minutes released too

    http://www.businessinsider.com/markets-rally-on-bernanke-qa-on-current-monetary-policy-2013-7
    http://www.calculatedriskblog.com/2013/07/fomc-minutes-many-members-indicated.html

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