Wednesday, January 12, 2011

S&P 500 - Comparisons To Prior Correction

We've all been studying charts trying to find any sign of price finally breaking for some sort of a correction. The longer this market rallies without a correction the larger that correction should be. Before digging into the chart below, few points need to be realized in understanding what is underneath this current market:

Leverage is back to LEH levels which can exacerbate selling as margin enhances losses and causes phone calls from brokers.

Bullish ratios have been above historical highs (and bearish below historical lows) for weeks on end now.

Insiders continues to sell at the 100 plus to 1 ratio versus buyers and it's been going on for months now.

Money continues to flow out of domestic equity funds. We are on about 37 weeks with only one minor inflow at year end 2010 (working from memory but think the inflow was less than 1 billion).

The VIX has bottomed and matched the prior lows of the May correction.  Note it bottomed two weeks before the SPX topped.  There was an interesting read on Zero Hedge about the VIX in some sense not being very cheap.  It was based on the fact that realized volatility has been very low (not a lot of volatility when markets just go up and up).

Let's look at the chart of the SPX and see some comparisons to the prior sell off in May 2010 (which seems like an eternity now).

Notice the bearish divergence on the MACD through the entire rise off the Feb low to the April high (lower MACD levels while SPX price was rising).  Very similar divergence to the current rally.

Notice how long the slow stochastic stayed overbought in the Feb to April melt up and how it compares to the current melt up.

Orange horizontal lines on the current melt up are the gap fills that need to be filled at some point.  There are seven that I count.

Notice in both melt ups how price hung on the upper bollinger band for most of the move.  The SPX has not touched the lower bollinger band since 8/25 (almost 5 months ago).

The May high was exactly 135 points above the 200MA on that day.  Today's closing price was exactly 135 points above the 200MA today.

Notice the candlestick pattern inside the two orange boxes.  Fairly similar price action.



  1. Interesting.

    The current 200 day period probably started around 4/1/2010. That means as we move forward, advances in the market will be cancelled out by the May 2010 decline, which means the 200 DMA will more or less stay constant, or even decline a bit. This will produce more divergence if the market does not correct.

  2. By examining the Stoch, MACD and RSI patterns, it seems we are one or two more weeks to go before they finish a pattern to match those of April/May.

    Not so?

  3. Not sure if I agree we need 1 or 2 more weeks. Also not sure what will finally roll this market over. One thing I suspect or should I say two is that inflation scares may start to gain steam and I have this suspicion that people are beginning to question the Fed. Regarding the Fed the jig may very well be up. Lots of questions on their solvency, need for a bailout from Treasury, inability to one day shrink their balance sheet. 1285 on the SPX seems like it could be the top. JPM earnings in the AM could tell a lot about the economy in terms of credit quality, credit creation, etc. The report will be good at the headline I am sure but behind the headline it could paint a pretty sad state of the economy.

  4. It is openly discussed in TV that bank earning will be skewed by massive reduction in reserve given default has subsided significantly. So earning headline will be strong and positive. Not sure how the market reacts.

    But I doubt serious correction will start until after the earning of our biggest hope, Apple, reports next Tuesday.

    Great observation and insight.

  5. Thanks George. The financial trade has really caused a lot of koolaid drinkers. It was a beaten down, heavily shorted sector that got a massive squeeze (self included) at the end of the year. Bulls see this as confirmation of a new leg up in equity markets and many are questioning if they should go long banks. BAC for example up 40% in 5 weeks. Please who would chase that dog. It's also up 40% in the face of accelerating downward home prices, increased litigation expense, slowing foreclosure process, the list goes on. Blows my mind how quick people forget how bad the banks are seem them powering higher and higher. Sure they can short term but beyond the next few weeks, no way.