1) The Spectre of the Analog

Perhaps it's the Paul Tudor Jones documentary that's been making the rounds... and getting pulled just about everywhere it shows up, but over the past week I've seen more analog charts floating around than I can remember in quite some time. In the Paul Tudor Jones video, which was produced around 1986-87, Jones and his partner, Peter Borish, discover an analog between 1987 and 1929 that is running at about a .91 correlation that seems to be increasing.

Of course, what is underexplored is that analogs require some foundation beyond what looks like back-of-the-envelope pattern similarity. For example, Jones and Borish in 86-87 didn't simply look at the price movement of the Dow and notice a similarity to 1929. The correlation had an added recognition component tied to Elliott Wave pattern similarity. DeMark indicators offer the same ability to gauge analogs... but we'll get to that in a moment.

This morning a chart overlaying the S&P 500 and Dow Industrials from March 5, 2009 to present and November 13, 1929 to April 11, 1930 is drawing attention. Below is that analog duplicated on Bloomberg.

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Without question, based on pure observation alone, the track is very close. The duration of the post-crash rally in 1929 was 107 days. The duration, so far, of this rally has been 104 days. We'll look at this closer in a moment.

You may remember the 1974 analog discussed here in Minyanville last year. That analog worked very well for nearly a year before diverging last winter. One reason it worked so well, however, is that beyond simple visual and even price pattern correlation, there were DeMark indicator counts correlating at important peaks and troughs as well. With that in mind, let's go back to the 1929 analog.

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See the solid red line prior to the 9 TD Buy Setup that occurred in the '29 crash? That is a qualified break of a TDST trend line, indicative of an important negative trend change. After completing the TD Sell Setup 9 in late February 1930, well below the TDST dashed green line overhead, the expectation would be that the INDU proceeds to a full countdown at some point, finding full downside exhaustion with a 13 TD Sequential Buy Signal. Only a break of TDST upside resistance would suggest the power imbalance between sellers and buyers has changed enough to move sellers into the buyer camp.

Now, since the original analog is comparing the present S&P 500 to the INDU from 1929, let's take a look at the S&P 500 today.

Unlike 1929, there is an important difference. The S&P 500 did break a TDST downside level, but that was in January 2008, qualified the break in February 2008. From the break of that level to the March low, the decline was more than 50%.

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That's a pretty good bear market right there.

But look at what has happened since:

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The solid green line indicates a qualified break of a TDST Upside level, a change in intermediate trend. The expectation is that we get a full TD Sequential Sell Countdown, currently only on bar 5 of a potential 13. If so, that would take a minimum of eight more weeks before a potential TD Sequential Sell Signal prints. Remember, however, TD Sequential does not need to be consecutive bars. The count could stretch on for some time. The former TDST level at 890 should be viewed as an important area going forward.

As well, we are now approaching a target zone, based on TD Propulsion (daily and weekly) and TD Absolute Retracement, 1014-1025, basis S&P 500 cash index.

So what's the bottom line? We have not yet reached upside exhaustion in pure indicator terms, but our target is at hand. The move through 1000, an important psychological barrier, could quickly force underinvested managers and bears to cover, making 1025 reachable very quickly.

Remember, the fourth quarter, based on our quarterly charts, is where the action really should intensify and provide longer-term clarity. We are not out of the woods of this major secular bear market, but in a couple of months we will have reached a critical inflection point.


2) Velocity Slowing

It's not just the velocity of money that has been having a tough go of it over the past couple of years, the velocity of nearly everything is slowing. This is not exactly surprising. It is precisely what should happen when social mood shifts to negative. Why? Because, as the main driver of social action, waxing and waning social mood determines the character of social events, culture and interaction.

During periods of positive mood, which are characterized by a desire for increased risk-taking and expansion (bull markets), speed and acceleration are closely associated with nearly all aspects of social events. During periods of negative social mood, however, the opposite forces emerge; a desire to retrench, withdraw and slow down. One of the many ways this manifests itself is through actions that reinforce slowing velocity. Consider increased regulation. While deregulation and the opening of markets is a hallmark of bull markets and increasing velocity of money and transactions, increased regulation has the opposite effect.