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Uptrend

Halfway

Rating: 3 votes, 2.33 average.
The reversal and 60 point ride off the bottom from SPX 1738 to 1798 in the last four trading sessions has been quite impressive. Start of a new trend? Not so fast, let’s look at the chart below. Since November of 2012 the SPX has been on a steady uptrend. We see peaks 1, 2 and 3 forming an upper trendline as the advance continued and a break of that line to the upside during October, 2013. Further we see a retest of the upper trendline during December, 2013 acting as support; accompanied by high volume. January brought a dramatic increase in volatility around mid-month with a decline of 6.1% from 1851 to 1738 in 12 trading days.

It appears an ABC chart pattern to the downside may be in the works, with the completion of wave B soon. My wave targets based are in part on Fibonacci relationships with wave A (1851 to 1738) completed, wave B (1738 to 1808-1814) underway and near completion and wave C (1808-1814 to 1652 -1640) to finish the downtrend. This targets a further 11% decline. I have no proof this will happen, but offer the following supporting observations: 1) Significant upside resistance from the upper diagonal trendline and a horizontal trendline coming in near 1812 remains, and is reasonable that a backtest of the broken trendlines are underway, 2) The SPX is below the 50 SMA coming in at 1809 and it now has a slightly negative slope and also happens to be a Fibonacci turning point, 3) If this were a V bottom we should see increased buying volume similar to the trough between points 1 and 2 on the chart but we do not, 4) Volatility has been steeply increasing and for a new uptrend one would expect a decreasing slope, 5) There is no upward MACD cross from the recent sell-off, so the technical damage has not fully repaired itself, 6) Volume by price has steadily decreased while the SPX has moved higher suggesting less accumulation at these levels, 7) Bonds have been showing strength, 8) Institutions are not buying in earnest and in fact the up/down ratios indicates they are selling into this rally, and 9) February jobs report showed that hiring in January was surprisingly weak (113,0000 vs. 185,000 expected).

Any close above the 1808-1814 area for several sessions would nullify this ABC pattern and downtrend. However breadth including momentum has not been participating and the ratio of advancing/declining issues to total issues is now overbought.

As we know the markets can be full of surprises, but in my way of thinking this is not a recipe for much of a follow through. Sure a few more days of upside may play out. However, I believe short term gains are limited with substantial downside risk.

Short term caution-spx_02_08_14-jpg

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Comments

  1. bmneveu's Avatar
    this would end up matching the 1929-30 chart that Tom pointed out

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