S&P 500 Index Is Revealing a New Confirmed Secondary Bearish Trend
This does not, however, provide any indication toward a breach of the longer-term cyclical bullish trend.
– Thomas Edison
Welcome back to those who took a few days of respite and I hope the break recharged your half-year-mark batteries. Given the action in the Four Sisters last week, it looks like you'll be glad you rested. Proceeding Friday's 2.5% gap-and-go ending to the second quarter, the 3.5 days were fairly lackluster and somewhat perplexing. Nevertheless, the technical action did become very telling and provided a small semblance of clarity not seen as of late. Recently I discussed a longer-term secular (monthly) technical stance of the S&P 500 Index (SPX) going back over 12 years and pontificated on the uncanny enormous cyclical volatility present since the 2009 bottom. Today we'll become more granular.
Throughout the dozen-plus years of writing technical newsletters my firm has continually articulated how all trends' cycles are similar in nature no matter what time scale is being analyzed (monthly, weekly, daily, or even hourly). Once understood, this harmony allows investors to assess their risk stance at any given moment and for any timeframe. Correspondingly, it also provides a metric in which to evaluate one's portfolio efficacy. This technical approach can be accomplished from top-down or bottom-up; it's somewhat irrelevant if it concludes the same result.
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As stated, last week's action provided further clarity on a technical basis, which was yet apparent since the May lows; evident in the Nasdaq 100 Index (^NDX) daily chart above. Walking through the graph we first notice the three momentum indicators (RSI, MACD, and the Stochastic) and the volumes are all poised for divergence -- higher prices with less power and structural integrity (red and blue arrows on chart). Nonetheless, these are only warning signs and typically are used as secondary measures to confirm trend analysis.
Secondary Trends – Counter-Cyclical/Shorter-Term
With every trend requiring three confirmed points, we can now, after this last holiday week, depict the latest confirmed resistance inflection point -- hence the further clarity. This appears in the form of a technical pattern called a "bow tie," and no, it does not mean we're going to a ball. A bow tie is where horizontal floors and ceilings (black line) meets with a projected downtrend (red line) and retest of a broken uptrend (blue line). Adding this to the momentum analysis described above, it gives us a high probability inflection resistance point, in this case at 2,650-2,660.
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At the risk of repeating mysef, this analysis should be done on every timescale to ascertain all underlying risks. In absence of the secondary momentum indicators, we duplicate the prior analysis on a weekly basis. As you can see we have outlined the cyclical and secondary trends as of late and, not unlike the NDX, the S&P 500 Index (SPX) is baring a new confirmed secondary bearish trend (red). Conversely, this does not provide any indication toward a breach of the longer-term cyclical bullish trend (thick blue line); more so, it signifies a potential retest of May's lows or the bullish cyclical trend itself.
My firm's analysis is all about risk/reward and the ability to ascertain it on the timeframe in which you invest. It is our unmitigated belief that all investors, institutional and individual alike, have to manage not on the optimism of return, but the arithmetical measurement of risk. Trend within trend analysis will become an incredibly important tool to master over the next six to eight years!
We hope this helped!
Editor's Note: Read more at Tesseract Asset Management.
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