The Chart Remains the Same
Crowd behavior often traces out repetitive patterns because the human brain is wired to seek out patterns from the past.
I had a dream. Crazy dream.
Anything I wanted to know, any place I needed to go
--Led Zeppelin (The Song Remains the Same)
The week before last, for the first time in eight weeks, the S&P lost ground closing below the prior week's close and suggesting the possibility for a pullback or consolidation. Moreover, the Weekly Swing Chart had been up for 10 consecutive weeks – a long time by historical standards.
Increasing the odds of a pullback, the Chinese market sold off 6% last Tuesday. However, in contrast to the February plunge in the Shanghai index which caused intense selling in world markets, last Wednesday morning U.S. stocks opened down but found a low in the first 10 minutes of the session.
Last Wednesday morning the S&P found support on its 20 day moving average as it has twice before in the marry month of May.
This recent support coinciding with the 20 day moving average has carved out a three-point trendline at approximately 1515 S&P which curiously enough coincides with the current level of the moving average also at 1515.
Last week's low on the S&P was 1510.05. Only a break of 1510.05 this week will turn the Weekly Swing Chart down. That's a ways below as the S&P closed last week at 1536.35. So, it suggests either an eleventh week up for the Weekly Swing Chart or an unexpected sharp sell-off.
In normal markets, whenever the Weekly Swing Chart turns down, we get a chance to take the market's temperature and get a feel for the position of the market by measuring the subsequent behavior after the turndown. However, because the S&P is already stretched for 11 weeks there is a good likelihood that because we are in a blow-off phase, in my view, the S&P will likely just go to where its going and exhale to wherever its date with destiny is before pulling back meaningfully.
In Friday's column I mentioned that natural resistance would be at 1541 S&P as Friday was 1541 days from where it all started on March 12, 2003. The index ran up to an early high of 1540.55 before backing off to close at 1536.35. Using the same analysis, by the next option expiration on June 15, this same "natural resistance" will be at 1555 which satisfies the agenda for a new all time intraday high by 2 points. This is interesting because there are two other factors coinciding with this time period.
- There are over $25 Billion of initial public offerings due in this period, including the big Blackstone offering.
- I believe there is a strong likelihood that there are many short baskets initiated in March for the last triple witch option expiration that could well remain trapped into the June expiration.
The last swing low on the S&P was on March 14. Consequently June 15 also ties in with the 90 day pattern of two other memorable 90 day blow-off peaks, 1987 and 1929.
Although the financial markets are chaotic, equity prices depend on human beings, the traders and investors both professional and non professional who buy and sell stocks. Moreover people often act based on emotion rather than logic. This is especially true when value and growth markets morph into momentum and liquidity driven markets – when herd behavior dominates. Crowd behavior often traces out repetitive patterns because the human brain is wired to seek out patterns from the past. As a species we are predisposed to find comfort in trends and patterns. The human brain is wired to make predictions from past patterns and take risks in search of big rewards. Therefore because liquidity runs both ways (just ask the Japanese) and is largely a function of confidence, it will be interesting to observe the behavior of the financial markets over the next month.
The song remains the same. We know parabolas end badly but we also know they can go much further and farther than imagined. The refrain that this time is different is popular as parabolas go. I'm beginning to hear that refrain more and more lately. The song remains the same.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter