Thursday, February 25, 2010

The S&P Review for February 2010

While we work to restore following a DDoS attack I took another look at the relative position of the S&P to its key moving averages (20-day, 50-day and 200-day). In January I summarised:

If you are a bull and are looking at buying this dip it may be prudent to run a tight stop of 1-2%. Stay out altogether if the S&P loses more than 6% off its 50-day MA.

If you are an unsure as to what to do, it's best to take what profits you have and adopt a wait-and-see approach, or at least keep your market exposure to a comfortable minimum.

If you are a bear, then any rally which emerges should stall out at the 20-day MA; only when a sequence of lower highs and lower lows emerges will the trend be in your favour
In the weeks that followed the S&P lost a maximum of 4.9% to the 50-day MA and was able to break above its 20-day MA - favouring bulls. It is currently pegged by its 50-day MA and today is in a battle at the 20-day MA so bears are having more influence. However, the market still has to put in a lower low so the long standing bull trend from March 2009 is intact.

One of the concerns from January was the pre-crash match to 1987; but this match no longer features. Of the time periods in play we have gone from a very narrow pitch to a very loose collection:

March 2004: 2 matches
December 1997: 1 match
April 1997: 1 match
January 1996: 1 match
January 1986: 1 match
April 1985: 2 matches
August 1983: 1 match
September 1978: 1 match
June 1976: 2 matches
April 1972: 1 match
July 1967: 2 match
April 1967: 1 match
May 1964: 1 match
July 1963: 1 match
October 1955: 1 match

The one that stood out was the 2004 match as Babak of Trader's Narrative has continuously mentioned the similarities of the current market to the market back then. From the perspective of the chart what tends to follow is a trading range. In the case of 2004 there is a mild bearish bias - but no meltdown.

Taking a second look at the aforementioned matches they tented to group by years

1996-97: 3 matches BULLISH

All these matches were pauses in the longstanding advance. April 1997 is typical of this pause

1983-86: 3 matches TRADING RANGE

The chart for 1986 was very similar to '96/'97 with a pause in the advance. However, the other two matches lead to more scrappy affairs - not unlike 2004.

1976-78: 3 matches TRADING RANGE

A trading range was also the result for the '76/'78 matches:

1963-67: 5 matches BULLISH

1967 was a bit of a mixed bag with a scrappy rally, while matches for '63/'64 had more in common with '96/'97.

The odd matches were 1955 and 1972 with one count to the bulls (1955) and one for a trading range (1972).

However, all trading ranges eventually gave way to rallies. So, is current market behaviour simply a pause in a longer advance? Has the counter rally done enough to instill belief the economy is recovering? The answer would appear to be 'Yes' - although those in Europe might not feel it.

However, meandering around in a trading range for the next 12 months would not be surprising.

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