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Tuesday 16 December 2014

Just The Stats Ma'am

Those who cannot remember the past are doomed to repeat it 
- George Sanatanaya in The Life of Reason 1905

I'm hoping some of you guys took the ES trade I laid out at the bottom of my post yesterday. I only took it half size as I had to be out for the first ninety minutes but shortly after my return I cashed up a very nice +32 from shorting 2012 on an order I left on when I went out, and went long at 1979 shortly afterwards. If you took the trade I would mention in passing that I have a donate button on the right hand side of my blog, and I'm currently putting together some funds for having a professional makeover on the blog, and am hoping to do that from donated funds to avoid changing my blog from being a cheap hobby into being an expensive hobby. :-)

That long trade is the one I want to talk about this morning, as I have been getting quite a few comments that the main top is in and that the current decline may well run away. Anything can happen, but I'll explain at least why historically that would be very surprising.

I have talked at some length over the last few weeks about the history of retracements after long runs over the SPX 5 DMA, and of the five examples since the end of 1961, the largest retracement was 5.9%, in the only previous example that was in December (in 1996). If we were to see a decline of the same size here then that would target 1956 SPX, or 1949/50 ES. Anything below that would be an outlier.

There's more though. I mentioned yesterday that there were only nine instances since 1970 where the low in December was lower than the low in November. Five of those happened in years that closed red for the year as a whole, so mostly that has been a bear market thing. Not a single of of those nine examples went on to close under that broken November low (at 2001 SPX here), and the historical target range for the December close here would be 2020-2150 based on these past examples. Anything above or below that range would be an extreme outlier. Five of the nine closed green on the month, which in this case would require a December close above 2067.56 SPX.

However the question on our minds here is also how low this retracement could go before the rally into the end of the year begins, and the December stats can help here too. Of the nine previous examples seven were at 2% or less from the broken November low, giving a range low in the 1959 SPX area. Obviously that is a very good fit with the range low from the 5 DMA stats. That doesn't mean that we test that level of course, it just means that we could. The other two were 4% below but I'm disregarding those as they were in 1973 and 1974, in the grip of a very brutal bear market.

I was looking at the ES 3 SD lower band stats yesterday and as I said yesterday morning, seven of the previous eleven of these went on to hit the 3 SD daily lower band the following day. Of those seven there were three that hit the 3 SD lower band on the third straight day, and so if we are to do that today I would be looking for a possible hit of that band that could be as low as the low 1950s ES March, which would again be a decent fits with the stats I've looked at above. We could hit the 3 SD band without breaking the ES globex low at 1961 however, as the 3 SD lower band would rise over that if we were to see a decent rally to the 2000 area today, so even if we do hit the 3 SD lower band today, that may already have happened. There were no previous examples that I have looked at so far where the 3 SD lower band was hit on a fourth day.

For today very strong support is in the 1955-60 SPX area, weak resistance is at the daily (2 SD) lower band at 1986 ES March (1993 SPX) and strong resistance is at the 60 hour MA at 1994 ES March (2001 SPX). I also have this in play on SPX. SPX 60min chart:
That is a perfect falling channel established on SPX at yesterday's low. If that was to hold today, and I am aware that my channels have been leading short and tragic lives in recent days, then I have channel support in the 1980 SPX area. If that holds on a test this morning, that is a possible retracement low level to be confirmed on a break up from the channel. When we do make a low for December, the rest of the month may get pretty boring, so enjoy the volatility while it lasts. :-)

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