$SPX Monthly

SP:SPX   S&P 500 Index
245 5 4
$SPX             off 65.77pts & 3.56%. No big deal at this time. Just another dip buying opportunity, right? Maybe.

On the chart, I've marked in two bars that represent what I think will happen in the next two months. I do believe we will see a green candle for February but it will be a struggle. For March I expect another red candle. After that, no clue. And, of course, I could be totally wrong and markets gain traction and take out the recent highs at $SPX             1850 and never look back. I will believe it when I see it.

According to Dow Theory, markets move in three phases: The accumulation phase, the markup or public participation phase, and the distribution phase. The distribution phase is followed by a decline and during this phase retail investors off load their stocks at any price to the waiting large players. And the cycle begins all over again.

Why am I mentioning this? It has to do with the $TRIN which leads me to believe that we've just witnessed a major distribution phase by the larger players.

I've mentioned this before but I'll mention it again. Starting on December 23rd, when we entered the consolidation zone, and going through January 23rd, the day before we broke down out of the consolidation zone, the $TRIN closed above 1.00 fourteen times with 7 of those closes above 1.00 occurring on green days. This is the longest streak of $TRIN closes above 1.00 that I can remember and when you add in the fact that 7 of those closings happened on rally days then you have overt and covert distribution going on. But the key is that these numerous high $TRIN closings spell out major distribution by the large players into the hands of retail player who, for the most part, don't know much about the markets and get most of their information from the various bubble vision sources.

Based on the above, I believe that we've seen major distribution by the large players. And why not? These players are well aware that Fed liquidity has been a key component in this rally and no one knows how the reduction in this money is going to impact the markets. And, as the saying goes, "In times of uncertainty, cash is king."

I have a 50/50 chance of being correct in my analysis and if I'm correct then stocks will be re-priced lower for perhaps several months. If I'm wrong, then $SPX             will push up through the bottom of the previous consolidation zone at around 1811, or so, and then keep going until it launches above 1850 and we're off to the races again.

Since I don't short anything anymore, I prefer rally phases so it's quite all right by me if I'm wrong.

GL in the week ahead.
Curtis - I'm glad to see you plotting channels. I use channels for major indices, especially the SPX. I have observed that the SPX has traded in a very well established trend channel for 5 years now. Technically there was a 22% bear market in 2011 that dipped slightly below trend. The 1 year SPX channel was remarkably disciplined in 2013. There were 3 reasonably significant correction in 2013 with two on them bouncing off the lower channel and the third coming within 1%. The current 1 year lower channel is in the 1740/1750 range, and as you state the 5 year mid-channel is near 1705.
While I have observed channel resistance and support be maintained on fairly regular basis. In both cases I believe there needs to be a precipitating event(s) to cause a break in trend either up or down. Potential breaks above could include significantly higher GDP growth, or earnings/revenue. I think those are low probability. For a break to the downside, the EM currency issue could (easily) escalate and ripple. I think that is a higher probability. A 1 year SPX lower channel test near 1740/50 could occur this week, and fail if the EM issue heats up. Overall I believe there is a higher probability of a lower channel fail than upper channel breakout. A third scenario is to simply trade within channel and follow the uptrend.
With all that said...Do you place greater emphasis on the 1 year channel or multi-year (5 yr) channel? The implication is that if the 1 year channel is breached, the 5 year channel maintains significant support.

Thanks - Glenn
CurtisM SimGlenn
Sim, if the lower channel on the one year chart should fail to hold and this is confirmed by several days then you could have a measured move down based on the width of the current channel. I put the width at about 120pts. Since the current lower channel on the daily is now at about 1760, then a measured move down would take $SPX to around 1640. This is an important level as this area provided strong support in August and October of 2013. This is also just about where the lower trend channel line is on the monthly chart. This area around 1640 is then a confluence area. Now, to answer your question, I would place much more importance on the failure of the 5 year chart support level over the failure in the one year time frame. And if the monthly channel line should fail, it could be a game changer with the potential of signaling the end of the current bull market. I think we may visit the 1640 area before this decline ends and I think the repricing to that level should be enough to work off most if not all of the froth that's currently in the market. I do not foresee the end of the bull market but that is always a possibility.

Thanks for your comments.
@CurtisM - Would you please explain what made you decide on the points that define your Fib matrix. I can see that the 1.618 extension defines your target, however, I am not seeing the particular characteristics of the points that you chose. I have a higher reversal target defined in this chart:
, so I was curious as to your points 1 and 1000 of the Fib matrix landing on that particular target value of 1811. TIA, David.
4xForecaster PRO 4xForecaster
*typo: "... your points 1 and 100 of the ..."
CurtisM 4xForecaster
Actually, since I first set that chart up a couple of months back, the Fib points have drifted around so I've put them back where I originally had them. The A point is the candle body from March of 2009, the B point is the candle body high from April of 2010, and the C point is the candle body low from June of 2010. This moves the 1.618 projection down from 1962 to 1651. From looking at your chart, you are apparently using a much longer range chart.

Thanks for you comments.
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