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A Look at the SPX Quarterly Swing Chart

Aug 07, 2014 7:52 am Print Print

There was every excuse for the indices to follow through to the downside from Wednesday's gap.

However, after some backing and filling, the market held with the SPX eking out a flat day -- another close at the key 1920/1921 level discussed yesterday. The market seems to know this level. Whether the SPX is bear-flagging here at 1920 or consolidating is the question.

Yesterday, the SPX set a new low for the move into the time frame of a presumed turning point, and close enough to an idealized level of 180 degrees down at 1903 to take notice.

That said we've all become, by necessity, BTD (by the dip) detectives in the last few years as each shallow setback has carved out a pivot for new highs.

If the market is inclined to try for a new high, it is going to be a battle between a potentially bullish possible third higher low on the SPX at another test of its 50 dma and that of a bearish looking break of a rising wedge.

The RUT turned its 3 Day Chart up yesterday. The prior occurrence saw the index gap down the next session.

A change in behavior could see the index backtest its 200 dma into gapfill near 1140.

As on the SPX, there are dueling patterns on the RUT.

There is a Megaphone Top for 2014 on the clock (and a big potential double top). At the same time, arguably, the RUT may be tracing out a 7-month inverse Head & Shoulders.

It is worth considering that the spring turndown was 50 sessions ago now and that this will weigh on the 50-day moving averages on the indices. So the 50 dma's could be rolling over soon if there is not impulsive upside price action.

Notably, the last time the 50 dma on the RUT converged with the 200, the RUT exploded to the topside. A failure to generate upside traction as the two averages meet and a possible subsequent crossover of the 50 below the 200 would be a sign of the bear.

Pulling back the lens on the SPX shows the Quarterly Swing Chart hasn't turned down since 2011. To say it is stretched is an understatement.

Note that even in the advance from the 2002 low, there were frequent turn downs in the quarterlies. That was a real stair-step rally compared to the escalator since 2011.

Interestingly, despite the many turndowns in the Quarterly Swing Chart from 2003 to 2007, there were really no signal reversal bar quarters until the 4th quarter of 2007. Notably, the 3rd quarter in 2007 was an outside up quarter. The presumption is the outside up quarter should have put the SPX in a position to power convincingly above the 2000 peak. However, instead, the next quarter left bearish Train Tracks. When Q1 in 2008 snapped the low of the prior outside up 3rd quarter, it triggered a Reversal of a Reversal sell signal. The crash of '08 followed that signal.

We are not yet mid-way through the 3rd quarter of 2014; however, further downside pressure could see quarterly Train Tracks. It would take a close near or lower than last quarter's lows. The last quarter low on the SPX was 1814.36. That's not far-fetched. Notably, the SPX hasn't had a down quarter since 7 quarters back -- just prior to the breakout above the 2000 and 2007 peaks.

Conclusion. The shallow 3-5% correction that many players were praying for has materialized. However, the market is stretched based on the action in the Quarterly Swing Chart. Consider for a moment that the above chart were not a quarterly SPX but a daily. Would a backtest of the breakout level be unexpected? If a reversion to the mean of the SPX's persistency and consistency plays out, a 20% correction ties to a backtest of the 2000/2007 tops.



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