Here’s my 2013 market outlook for the S&P 500, wherein I discuss medium and long term analysis, and reveal why I believe it’s time to begin preparing for a potentially large correction ahead. Read More…
Medium Term Outlook
I can’t help but feel a little deja vu when I see the daily chart of the S&P 500 cash index. You see, the index has gotten a very nice bullish start to the year by breaking through the top of the clearly-defined triangle pattern, which developed over the course of the last four months of 2012.
As it turns out, the index started the 2012 year in much the same way, but the triangle pattern was quite a bit larger than the current version. I wrote about the 2012 triangle last year (HERE), and my analysis was fairly on point.
This time around feels similar, only I believe we’re at the tail end of a very decent 4-year bull trend. More on this later.
The daily chart shows the $SPX got a clean breakout through the upper line of the triangle on the first trading day of 2013 (just like last year). So far, prices have held fairly decently just 9 trading days into the new year.
Since the backend of the triangle measures about 130 points, I’ll be looking for the $SPX to approach a target of about 1,545 within the next three months, with an outside chance of reaching as high as 1,580.
Keep in mind, the S&P is currently testing a very important wall of resistance at 1,475, which also corresponds to the monthly R2 Floor pivot. If the index cannot rise beyond this level soon, we could be looking at a near-term sell-off that could spark a test of the monthly pivot range at around 1,425.
Watch 1,475 and 1,450 for short term directional conviction.
Long Term Outlook
While the triangle in the daily chart indicates short to medium term strength ahead, I’m afraid the weekly chart is giving off vibes of stalling, or perhaps worse.
Take a look at the weekly chart, and the five arrows I’ve drawn. The big rebound of 2009 shows a very bullish wave of price movement from the 666 bottom, complete with a nice steep slop.
The second arrow shows another wave of nice strength, but the move fell short of the distance covered during the first wave of the bull trend.
The third, fourth, and fifth waves of strength all covered vastly less distance, with each new high being relatively lower than its predecessors.
What does this tell me? The market is showing signs of exhaustion, or stalling. While the market has rallied strong for four straight years, the current price structure of the trend indicates we could be due for quite a correction ahead – one that could lead to a 20%-plus decline.
Watch 1,340
While there is no imminent sell-off danger, we’ll want to keep a very close eye on 1,340, as a violation of this level could be the spark that starts a major correction. Not only would breaking 1,340 represent a break through the most recent long term higher low, but it would also be a confirmed break through the yearly pivot range (pink lines), which oftentimes spells more selling ahead.
If, or when, the time comes and a break through 1,340 occurs, look for price to test each of the first two yearly pivot levels at S1 and S2, 1,299 and 1,171 respectively, with an outside shot to reach S3 at 1,083.
Within the longer term context of this index, 1,100 should continue to hold as long term support, and could represent a very solid buying opportunity for the next major wave of strength.
In terms of timing, look for the index to remain short term bullish out of the recent daily chart triangle for the next few months. Pay attention to the month of May very closely for signs of weakness, as the well known axiom “sell in May, and go away” could be the catalyst that leads to the larger correction we’ve just discussed.
What are your thoughts on this analysis? Tell me what you think in the comments section below!
I’m looking forward to seeing how this one plays out!
NEW Swing Trading Course!
Just a heads up, due to popular demand I’m currently putting the final touches on a fantastic swing trading course.
I’ll be formally announcing the course later this week, so keep your eyes and ears peeled.
Cheers!
Frank Ochoa
PivotBoss | Own the Market
Follow us on Twitter: http://twitter.com/PivotBoss
[cc_h_line color=”888888″]
[cc_list_posts post_type=”post” amount=”3″ img_position=”left”]
how is your new swing going to be compared to the adr swing which I haven’t purchased yet
Hello Jeff! The new swing course will be a complete Method for analyzing and trading the market, which will include setups, entries, etc.
The ADR Method [Swing Edition] course ONLY teaches targets, which will be a great complement to the new swing course.
Frank
The index is really meaningless now because the components are changed as needed to advertise the market in general. That being said do some basic math and you will understand how to manipulate the averages to make things appear to be something that they may not be.
So what am I referring to? The 2 average highs. If you were to take the average 2 year average high of 2012 and 2011 you have 142.65. (148.11 + 137.18)/2 = 142.65. So all you have to do if you want to paint is simply make sure that you OPEN THE YEAR above 142.65 and your 2 year average high is HIGHER then it was for 2012. Thus, at this point the 2 year average high is now (148.11 + 147.21)/2 and that is now 147.66. And yet, we have not even BEEN there. So go back in time to 2000 and 2001, 2006,2007,2008 and you can see exactly how to play the average game.
Now, if you do the math, you will find that in the past the price has gotten past the 3 all time 2 year average highs. The other issue to consider is that the SPY trades about 1.59 per day average 252 daily true range. So the question is, why even get involved up here on the long side when you know that the rolling yearly vwap is 138ish, and you know that the first standard deviation away from the mean is 142.86 and you know that 147.47 is the second standard deviation away from the mean. I think that it would help if you pointed some of these metrics out becuase in the end, losers buy highs generally because they are uninformed or they are forced to. Once that 2 year average high stops going up, this is over. That is always how it works.
A cluster of 2 year average highs have now been created for the year based on last years high and this years HIGHS of each day that have occurred. The clusters are as follows.
147.13, 147.24,147.36,147.60,147.63, and as of today,147.66. That is why your analysis is not complete. Sure, they busted the painted wedge, but there is a little more to it then just assuming that because the wedge was busted that it’s a sure shot to 1500’s. Yes it can go there, but, one needs to KNOW THE LEVELS as well to make a decision.
SO if this is going to pop, then we have to see this trade above every number I just gave you. And then it has to take out 148.11. And then a miracle will happen the 2 year average high will exceed 148.11 and it will really make the longs think all is well. By the way, if you doubt the thesis, take a look at APPL, PCLN, GOOG and so many more. The 2 year average high means quite a bit.
Any “guru” always sticks his neck out when making predictions, and no one has a crystal ball. I appreciate not only Frank’s analysis, but the technique he shares. Applied to smaller time frames and swings, I have found it is equally valid.
Marc B’s technique I also like, and utilize in a similar manner. The gap and squeeze move I believe is still in play, but expect not to have the same ending as last year. The election charade is over, but the Boyz want new highs before we are done, and then the 123 higher high needs watching for logical resistance areas, whether fibo, mm or whatever we use.
Blow off tops often can run a bit more than we think, so focus is on support, and until the print low of 1438 emini goes longs are still in control while shorts hope for another fat finger day.
Some catalyst needs to derail confidence, whether it be fiscal cliff or whatever, but we will recognize it when we see it.
Thanks for a great post.