SP500: Approaching Bubble Territory?? Part 3: First Attempt

SP:SPX   S&P 500 Index
1145 14 5
Update: Didn't take this trade, But anyway it wasn't a successful forecast.

In my earlier posts, I presented my rational behind being inclined to the bearish side on U.S. equities. Now, I am presenting the mechanics of my first shorting attempt.

There has always been a good positive correlation between short term WTI Crude Oil             and the S&P500             OVER THE SHORT TERM. Having that said, the recent downside break in oil             prices warns the it is probably the time for a correction.

The strong bearish divergence on the 14-week RSI also warns of extreme exhaustion, meanwhile, the index is hanging at the ceiling of this multi-year ascending channel .

I am risking around 2.5 percent, and targeting around 7 percent pullback for now.
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Obviously trade was a big loser
Hi technician, i like your chart but i think databased has a point. I will illustrate my point of view with some historical examples:

Following chart is from the OIL (white), compared to DOLLAR (green) and SP500(orange) and correlation indicator is between US Dollar Vs DUBS ( commodity index)

So general macro economic rules are as follows and can be validated in the chart on red box 1 and 2 (not exclusively):

1- Golden rule, the dollar is negatively correlated to commodities (although box 3 and 4 shows very short term neutral to positive correlation on 34 period, nothing alarming)

2- I think the way you have to take the problem, as Darabased and you said is on the demand analysis of OIL, think of it like the copper thus making this indicator as a lagging indicator. So the following assumptions would be: a- Better economy, more demand for oil, higher prices for stocks and oil and dollar goes down. This is box number 2. b- But the other case would be higher prices in oil (because of less supply or whatever) pressuring stock prices because of expensive oil prices provoking an eventual slowing of economy, as you can see in box #2.

So in your case this should be a leading lagging indicator, that is to say a sign that demand for oil is decreasing (or supply coincidently increasing at those reversing point --red arrows on charts), but yet market not reflecting this change on stock prices. So this is definitely the definition of a bubble and your post is theoretically right! :)

But everything is saying the same thing : market is over extended because FED prints money and we don't care about macro economics, or divergence, or warning signs of a impeding correction lol....But short term i am short SPY for sure, test of supports are needed at this point.

Thanks for your input BEI, really appreciate a constructive discussion. I have to mention that it seems that my point is not that clear yet, as i am trying to spot a short term trading setup here, and thus my suggested correlation has been effective over the very short term. The story is different over a longer term horizon, as it get more complex in terms of different factors affect inter-market correlations.
Technician I'm not sure what your exposure to macro economics has been, but I would be extremely careful when entering into this trade. While the last few years do show a correlation between the price of oil and a decrease in the S&P 500; traditionally a decrease in the price of oil is a very bullish signal because it increases the amount of disposable income consumers have available. In the american economy consumption is primary factor driving GDP growth and as we are approaching the holiday season we are likely to see record break sales that will further spur the S&P as consumers will have more disposable income going into the holiday season.
True, but this is from a longer term perspective. This more of a short term trade. One more thing, while the ideal correlation could be as you stated " a decrease in the price of oil is a very bullish signal because it increases the amount of disposable income" this is not not always the case, as security prices may be distorted by different factors such as financial crisis and geopolitical risks. (Please have a look at a post recently published by "timewest" which illustrates the recent correlations trends between stocks and oil prices).
I am not saying my trade is a perfect trade, there is a high probability of risk here as its a contrarian one, but it's just a trade that has a good reward compared to risk in terms of value.
Databased Technician
I would agree. Nothing is ever perfect and this could be a profitable short term trade, given the risk / reward. Just thought i'd make sure everyone understood the global macro strategy between oil/spy trades.
Nice job! Consider adding the correlation coefficient indicator on your next installment to illustrate where the breakdowns have occurred and what followed.
Nice there but still very speculative, i will keep an eye on it thanks !
Technician PRO AlexandreFF
Yeah sure, but worth a try :)
AlexandreFF Technician
Technician, i just made a chart, i'm quite newbie but still might be useful to give you another perspective it would be great if you could give your opinion thanks !
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