The price action in the S&P continues to provide more of the same clues: now is not the time to become overly bearish! We continue to see either:
- Below normal range bear conviction bars (opening no lower than the top 1/3 of a day’s range, close no higher than the bottom 1/3 of the day’s range) that is accompanied by above normal volume (either nudging Mean +1 standard deviation or greater). Or
- Normal range bars open and closing neutrally i.e. open and closing near the centre of the range (e.g. Friday March 6’s bar).
If we take this price action with the Barrometrics model of possible projections, we see that we are in high risk territory to institute fresh shorts:
- The S&P having broken the 2002 lows (768 basis cash) has approached the Maximum Extension at 641. The maximum extension is a price filter. If we have two closes below it (where at least one close shows bearish conviction), probabilities favour a trend change from up to down i.e. we have confirmation.
- However, even if we do see confirmation, I expect to see a retest of the breakout point 741 (2008 lows) to 768. As a rule of thumb, breakouts tend to be retested.
- The normal impulse move for the 13-week swing is 32% with a standard deviation of 15%. The current down move from the May 08 highs (1440 basis cash) to Friday’s low (668) is 53.7%. This is into the mean +2 standard deviations. Theoretically there is only a 2.5% chance of further downside. I prefer to say we are moderately oversold.
- Seasonally we can expect a rally to begin end March to early April peaking end April to early May.
- The 13-week swing move from 1440 to 668 has taken 41 weeks which is mean time. The standard deviation is 12 weeks. So ‘normal time’ could be up to 53 weeks.
- Normal time, greater than normal price range is an ideal pattern for a rally following the initial breakout. We have that now.
I am not suggesting longs unless you are trading less than a 5-day swing (weekly trend). We have not seen any change in trend patterns in my time frame (18-day [monthly trend]). What I am saying is:
- It’s time to consider taking money off the table if you have been short; or
- Tightening trailing stops and
- Not instituting fresh shorts.
The process described here is an important one for me. We have a model and compare the price action to the model. At best the model is a standard by which to measure our responses to the price action i.e. reality. In the event of a conflict between reality and a model, reality must always come first.
Refer this blog post to a friend or colleague…
