Saturday, October 8, 2011

How now, brown cow? - Market Analysis 7 October 2011

Over the past three sessions, the S&P500 (ES futures), together with all other global markets had a fantastic rally and the release of the US Non-farm Payrolls and Unemployment data seems to have determined the direction for a fourth day... Yesterday, I posted before the market open that we may be at the bginning of a powerful rally and it is clear that that is happening right now.

Looking at the daily ES futures chart, it looks bullish, but I would be very cautious of the sudden steep bear rallies that usually catch buyers/investors off guard. The 30 min chart shows the 200MA tunring upwards but the MACD is weakening and a bearish divergence is formed. A breakout will put the ES back into the bear flag, and this is likely to be followed with a good retracement later.

Now, it was previously posted about an uncanny resemblence of the current S&P500 technical picture to a Q12008. This was posted on 19 September 2011 and it has been about two weeks so I thought that an update would be good, just to see the developments.
*Coincidently, Conrad Alvin Lim also did an update, see his blog here.
In that same post, I posted about breaking the bear flag and testing the previous August low, and that was exactly what the ES did. However, it appears not to be following through with the bear flag target, and instead seems to be following the really uncanny technical scenario of Q12008!

Now, what I took a long time to do today was to realign the charts side by side, then adjust the axes so that the magnitudes matched as much as possible and then did some comparisons... I put the snapshots into Powerpoint and then made some drawings which were directly copied and moved over to the right panel. Therefore, the comparison drawings are of the same sizes.

Below is the updated chart from three weeks ago...

You can see that the magnitudes are almost similar in time and value. However, the current situation appears to be of a larger magnitude than previously. The chart is suggesting that the ES should be looking for a multiple wave rally to find its way to the 200MA, which should be about 1225. Fatoring the volatility, it may stretch as far as 1250 which is a test of the Head & Shoulders neckline resistance.

Below is the forward looking chart to demonstrate how bad this may be going. There is no certainty that the current uncanny similarity will play out, but for now, it is a growing possibility. The axes are also alighed and the measuring bars are identical. What can be seen is that the current situation is larger in range and the pattern formed at a lower level than in 2008.

These are the possibilities that could unfold if a repeat of the technical picture is followed through:
1. The current bear rally should meet the 200MA at about 1225-1250 and fail to breakthrough, sometime in December 2011.
2. The "ice-hole failure" should bring a lower low by the end of Jauary 2012 (which would also give the January barometer a very bearish read for the rest of 2012).
3. A retracement should follow and break down of 1050 some time in late April 2012.
4. This would then allow a completion of the final leg at a low of 600 by October 2012.

Taking the above technical turning points and time analysis, note that the current dateline for Greece is some time in mid December. The October dateline appears to have been postponed with Euro leaders postponing a meeting to next month, as well as talk about recapitalization of the European banks.

Another coincidence, or not, was that I read about Gann's financial astrology and it was already predicted in his book Tunnel Through The Air (TTTA) that May 2012 would be a significant turning point in the financial markets.

In conclusion, this technical similarity to Q12008 was posted 3 weeks ago and the consequent 3 weeks to date followed through accordingly. How things would turn out over the next few weeks to months may serve as a guide, and we should review this at certain time points as it develops. My humble opinion is that the coming (bear) rally where the ES meets its 200MA, may be the last stop before the train falls off the cliff. Risks are clear and present, so start thinking and make plans. It may make a huge difference by next year.

The MadScientist
7 October 20011
*Updated with the 2nd half of this post on 8 October - from Capella, Sentosa*
Note: Any material posted here is of my sole opinion, and my opinion may differ or change. This is NOT a solicitation nor advice proceed with anything else as a consequence of reading these materials. The materials presented here are intended for educational purposes only.

Charts by ThinkDesktop by TD Ameritrade IP Company Inc.

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