CurtisM

$SPX Monthly with implications of 2000 & 2007

INDEX:SPX   S&P 500 Index
432 3 1
In December of 2013, I put this chart together using the 3, 9, & 12 EMA's. I went back to 1998 and the idea was to calculate the % difference between the 3EMA and the 9EMA at market turning points in hopes of finding an absolute number that would suggest a market top was in place or was forming. That didn't work out, but what I discovered is that when you have a drop in the % difference in the 3EMA over the 9EMA at a new high along with divergences in the RSI , then this becomes a warning.

As you can see on the chart, in May of 2007, the separation of the 3EMA over the 9EMA was 4.3%, but in October of 2007, when $SPX             closed at a new high, the separation was only 2.9%. This showed a loss of momentum which, when coupled with negative divergences in the RSI and the CCI , strongly suggested that the $SPX             was nearing a top of some kind. By the end of November of 2007, the RSI had produced a failure swing and the CCI dropped below 100 and the rest is history.

This same type of chart set up with divergences in RSI & CCI occurred in August of 2000 when $SPX             made a new closing high in the monthly time coupled with negative divergences in RSI & CCI . In September, with $SPX             down 85pts, the CCI fell below +100 confirming that sell signal.

I'm not trying to call a top here, nor do I know what the current divergences and loss of momentum mean in today's context because back in 2000 and 2007 we didn't have all the HFT's running the show. It's very possible that the markets will ignore all this and just head north and so on, and so on. Regardless of whether or not anything comes of the warning the current situation implies, it's still a warning until proven otherwise, IMHO, of course.

Interesting chart here: http://stks.co/t030O

GL in the week ahead.
SimGlenn
2 years ago
Curtis - The SPX multi-year upper channel is near 1900, so unless there is a precipitating catalyst to cause a trend break, I expect that level to hold and create significant resistance. Potential catalyst could be significantly higher earnings, revenue, GDP, etc. but there is no evidence of this at all. Investor sentiment is still near neutral so I'm not concerned at this time with some upside still left in the rally. The VIX 5 EMA is still not near your froth zone, so the basic dependable indicators are still green for the near term. Still looking for some Dow industrial and transportation confirmation, perhaps soon.
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CurtisM SimGlenn
2 years ago
Glenn, I agree. The measured move from the lower trend line back to the upper trend line on the daily takes $SPX to 1880-1890 so 1900 is not out of the question. By then, assuming we get there, the froth should be pretty thick. Be sure to click on the link I just added to the original post.

GL
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SimGlenn CurtisM
2 years ago
Curtis - My strategy is to do some portfolio shaping in the next few weeks. Laggards that have only gone up with the rising tide get trimmed during the next 2 weeks. Frothy winners way above trend get trimmed some with the plan to buy those shares back and even add to those positions after the next mini-correction. Many of those shares will correct 2x the major indices.

Lastly, when I see the frothy near-term top signs and will add a hedge (SPXS) to buffer the fall. Unless precipitating events occur, I would expect the lower channel (by end of March) near 1770 to hold. If Ukraine gets out of control, that could cause a breach. I expect to hear all the weak economic data that has been ignored to come back into focus in the next couple weeks creating the mini-correction trigger. I am watching for a potential upper channel crawl like we saw the end of December. If this occurs, it could continue for a few weeks rather than an abrupt market turn. Overall, I'm expecting 4 mini-corrections this year. We had 2 (9%) in 2012, and 3 (5-7%) in 2013. I expect more volatility especially since 2013 ended at multi-year upper channel.

Regards - Glenn
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