Sunday, May 19, 2013

Anti-market-topping analogs

On Friday, I tweeted a few chart based analogs.

Since this recent 24% or so move on the SPX over the past 6 months has been relatively unusual, I was able to find a few examples that seemed to fit relatively well.  I then used the historical outcome to overlay how the current market would appear if it followed the same path (on a % move basis).

I've reposted the charts below to make it easier to see in one place. But as is the case with any type of technical analysis, there are always caveats to any type of analysis and The Reformed Broker makes a few for chart based analogs.

Why did I do this?
One of the motivations for this was based partially on the "are tops a process?" post earlier, as well as my net short bear call spread positions in my autotrading account (which is taking a lot of heat).  I personally "feel" as though we are very overextended, but my logical side tells me that the trend is still strongly up.

So based on this current "overextended" move higher, I was surprised to see how much similar moves in the past continued to go higher.  Even the move that lead to the 1987 crash eventually recovered and finished higher after a 3-4 years.

As for where this exercise could lead me, @justcharts tweeted to me a few other comparison timeframes as well as other data that could be considered, such as ISEE sentiment and other put/call related data.  Her helpful tweet opened up some new interesting directions based on some limited research I've done so far.

My bottom line takeaway?
If we're truly topping here, there's usually some good signs and a few weeks to exit.  Or, as the charts below indicate, we could just be getting started on a move higher to levels we currently find difficult to even imagine.  Always keep an open mind, the market is always right.

2011-2013 vs. 1993-1995
WEEKLY SPX 

FORECAST OVERLAY BASED ON 1993-1998 
WEEKLY SPX

2011-2013 vs. 1983-1986
WEEKLY SPX 
 

FORECAST OVERLAY BASED ON 1983-1990
WEEKLY SPX

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