Friday, June 18, 2010

$SPX trendlines (not all of them as in the last post from yesterday) just the ones we're directly involved with...

Plus the lower 'return' trendline, used to construct the 'channel', which is derived from the top trendline, and unlike that top trendline it is not the result of a primary computation...

Notice also the way the rally channel from the 6/8 bottom now looks:

Here it is the bottom trendline that is primary and the top one is derived from it by adding a price displacement, same procedure but different ordering of primary and derived, as the top chart in this post.

What's interesting on the rally channel chart is that the price action is no longer climbing right up it so much as it's sliding across the top of it, albeit with a slight upward bias. I think that bias ends as the 1.272 model's major trendline (as shown in the top chart),lowers over it... Over the last two trading days the $SPX has only advanced less than 3 $SPX points, from 1118.74 to 1121.01, whereas in the first few days of the advance, 5 to 10 points in a day was normal... Basically, the market is following my 1.272 model from the presentation here on this blog last Monday night of three models. The only difference between my modeling and reality is that slight upward bias that I didn't anticipate happening for the moment when the rally channel stalled near the price target, and price action started moving across the channel....
For anyone that didn't read the two posts about 'modeling the rally', that this post is referring to and built on, there is a lot of info in there, and new concepts, so here they are for those that want to review them:


Anonymous said...

eye opening update, Mark.

1) tightening of high / low range predicts a strong move.
2) primary chart indicates a pause / bounce at 1107-1112ish while the derived channel chart shows potential for a sub 1000 drop. Correct?
3) the channel chart "rollover" falling short of occurring at the top trend line might favor the sub 1000 move?
4) NOTICE that SPY's 5-6 point premium on $SPX TOTALLY evaporated on option ex Friday opening. If you look back, I'll bet that explains the last rally not reaching the derived rally channel upper trend line.
5) The rape of any naked call writers finished on Friday. Ditto retail put buyers. Would seem to me that inheritors (and who might that be?) of long shares might want to shed some of their "bounty.

mlytle said...

Hi Anonymous,
Yes, it does look like as the market declines eventually, it will have to cross the 1107 area again where there was a sort of double bottom, but the proximity of the 1.272 trendline at the larger scale is descending with time. It represents a sort of decay function or decay envelope, as price action that rises to meet it as it descends become exhausted and fails. There are three of those trendline sets (using the numbers 1.272,1.317, and 1.382 as seeds for the governing equations), and the market chooses which one it respects. I am noticing in this case the daily Bollinger Bands are aligning pretty close to the 1.272 decay function, and that's probably one of the ways the market makes it's choice on which limiting trendline to respect.
Once failure occurs, price action will easily and inevitably fall below 1000...The long term 1.272 trendline and it's brothers, were generated mathematically by the entire wave structure back to the March 2009 bottom. That implies a very large correction, with one of it's real possibilities being the entire retrace of the 2009-2010 rally.

The small rally from the 6/8 bottom has probably had it's day as it gets stepped on by the descending trendline. The hierarchy of trendlines and channels being governed by the size of the preceding wave(s) that produces it. The rally channel trendlines are generated from the data points only from 4/26/10 through 6/8/10, whereas the big 1.272 descending trendline is generated from the entire 2009-2010 rally, so it's authority is correspondingly greater. The small rally has power only until it is confronted by the greater limiting force with the longer generating base...

Your point about the difference between SPY and $SPX is interesting, I had never looked at that before. I'm sure the maintainers of the SPY ETF use some kind of model to trade the various stocks core to the $SPX, to simulate it's price behaviour, and I've heard they don't actually trade all 500 stocks, just a subset, and model the core stocks they use to give higher weighting in some to get the same overall price pattern as the $SPX. Something makes their model slip up a bit and you get those discrepancies. Those differences may in turn prove to be indicators of something, in this case, a potential top...