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Thursday 4 December 2014

A Long and Winding Road

SPX made a marginal new all time high yesterday and the odds against the bulls on the historical 5 DMA run stats improved in their favor, as only three of the previous five examples returned to make a new high. Two of those still failed at that marginal new high however, and if we should see failure again here then there is now a very nice looking double top setup that would target the 2023 area on a sustained break below Monday's low at 2049. SPX 60min chart:
Looking at those three past examples, the one in 1979 made a marginal new high (0.15%) on the second day after the break, then chopped around for four days within a 1% range before a two day decline that took SPX down 4% from the high. SPX daily chart 5 DMA run 1979:
The one in 1991 again made a marginal new high (0.1%) on the second day after the break, chopped around until making a further even more marginal new high on the 6th day after the break. There was again a two day retracement that took SPX down 2.2% from the high to the low. SPX daily chart 5 DMA run 1991:
The one that broke up was in 1986, albeit after making a 2.5% retracement. That broke the previous high with a lot of confidence and as they all did after the retracement ended, continued the previous strong uptrend up considerably further. SPX daily chart 5 DMA run 1986:
In effect that gives us the line in the sand today. If we see a conviction break to a new high, then there will be no particular reason to expect a reversal back down before January 2015 at the earliest. If we see a fail with a marginal new high, then that 2023 SPX target is close to the minimum we should expect given the five previous examples at a 2.5% retrace from the high.

I have mentioned a few times that after the retracement the previous examples all continued the previous uptrend. The moves up from the retracement low on the three examples above were 6.5%, 8.2% and 8% respectively. The moves up on the other two examples from the retracement lows were 9.1% and 14.1%. All of these moves were completed within eight weeks.

Is it credible to expect that kind of a move here? well if we see a larger retracement now then yes. If we see a retest of the 2000-20 area then we would be looking for a minimum of 2120-50 on the next move up. The monthly upper band is now at 2138 and on the chart below I've noted all of the serious retracements on SPX in the last thirty years. I'm taking those as being the retracements which managed a near miss of the monthly middle band or better. I count seventeen of those and of those retracements fifteen came off a full hit of the monthly upper band. The two exceptions were the initial move up from the lows in 2009/10, though that was a near miss of the upper band, and interestingly enough, the retracement we just had into the 1820 low. It would be extremely rare to see another serious retracement start without first hitting the monthly upper band.

A move on that scale from right here though looks hard. I have strong trendline resistance and the weekly upper band currently in the 2100 area and we would be looking at a minimum target of 2173. The next expected move up would make a lot more sense from lower and until we see a conviction break over the highs, a larger retracement is still what I'm looking for here. SPX monthly BBs chart 30yr:
Draghi has pushed discussion QE back into 2015 (surprise!), and markets are reacting negatively so far. The key level today is the SPX 50 hour MA at 2066 and bears need a conviction break down through that to confirm a rejection at the marginal new high.

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