Diary of a Financier

SPX update: Bearish setup in need of a savior

In Capital Markets on Wed 14 Aug 2013 at 17:30

The S&P 500 ($SPX) has moved sideways since I started tracking its bearish setup two weeks ago. Naturally, the patterns have morphed since then, but the overarching theme remains: this is a battleground. Mainstream media are starting to question the market’s resilience amid this little bit of stagnation. I’ve offered my intermediate-term outlook, but I wanted to refresh my short term technical appraisal.

I alluded to the latest SPY developments in a series of notes this afternoon (I & II). Having previously raised a red flag for me, SPY’s daily 1x bear divergence has kept lingering, as indicators were unable to reverse out of their downtrend over the last 2 weeks.

The intraday fractals magnify those going concerns. The 30-minute shows a tilted Head & Shoulders island top having fully matured and now resting just above neckline support >$168.5.SPY daily/30min/15min The balance of this week–particularly tomorrow’s trading day–are critical. You can see 2x bull divergence has started bubbling in the 30-minute chart, as echoed by the 15-minute. Now, the pricetrend needs to confirm that signal to avert a breakdown below the H&S neckline into a correction. Were the H&S to have its way, first support lay @ $165.7 (50DMA & fill gap down below island top) or -1.8% from tonight’s close; second support @ $156-7 (200DMA & June’s correction low) or at least -9.3%.

As a check, other broad indices like the Russell 3000 All Market ($IWV) also reflect this disposition. The Dow ($DIA) has actually already slipped below its neckline, but its 30min 2x bull divergence is very strong. Growth ($IWZ) in a 30min bull pennant looks a lot better than Value ($IWW), which is decaying after hitting a double top.

There is no better time than now for that “volume on the sidelines” I keep mentioning to arrive. Again, a lagging MFI manifests the summer’s low volume recovery from May/June’s pullback. That low volume combine with low institutional participation in this rally have a lot of managers underperforming their index, which anxious buying would be enough to trump high–albeit receding–margin credit.


We’ve continued to build cash in our portfolio, with liquidations of big positions like $BX and trimming of others like $GES, $SOXX, and $SNE all outweighing additions to $EXPE, $IBKR, and $CLF.

Our allocation is still heavy on risk assets, overweight the 60/40 benchmark with 66/28/6% (stocks/bonds/cash); beta is around 0.91 vs 0.76 benchmark; sigma 1.35 vs 0.83 benchmark.

As is my custom in both a bull market and a bullish outlook, I’m waiting for SPY’s reaction at this neckline before reacting myself. If SPY bounces higher, I expect to deploy that cash on new long positions in Brazil ($EWZ), Gold Miners ($GDX), and Europe ($EZU), as well as additions to $IBKR and indices $IWP and $IDV.


  1. Update…
    Futures ($ES_F) -10bps overnight after poor $CSCO 2q13 earnings, but selling started at 6:05am est, then accelerated at 7am with poor 2q13 earnings & SSS numbers from $WMT.

    $SPY -1.3% @ 166.5 intraday so far; H&S neckline broken.

  2. Update 2…

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  7. […] 2x bear divergences I’ve continually monitored. The MFI’s breakout, in particular, is a signal I’ve expected and awaited since this summer. In time, MACD should join that brigade, adding […]


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