Tuesday, November 18, 2008

Double Top Spoos

In the last post, someone commented on the apparent huge double top in the S$P 500, affectionately known as "Spoos" for the September futures symbol SPU. I will resist digressing into some of the other tradable names I have used over my career.

Anyway, the jumbo pattern on monthly charts is clear.

First, this is not a double top pattern until it breaks the support level at 768. But let's say it does. Where would we measure the target? After all, targets are supposed to be the height of the pattern projected down from the break.

Do that here and get a negative 37. Someone in another blog commented that a negative price might actually be real given the mess our mortgage friends got us into but that is another topic.

Show of hands - can spoos go negative? Of course not. Absolute support is at zero and if we get there who will care about the financial system? I'll want my guns and bottled water and a fortified, self contained mountain top cabin.

When measuring downside targets, especially for large patterns, I switch to log scaled charts and project physical distance, not price, down from the break point.

This is still apocalyptic but at least it has a chance to be valid. A drop like this one would erase 21 years of gains and bring spoos to their August 1987 peak.

Show of hands - who believes that a breakdown below October lows would kick off such a plunge?

For those of you who raised your hands, go change your underwear, have a beer and think about limitations on how "macro" technical patterns can get. I am a hardcore technical analyst but even I would not think that we can actually measure a decade long pattern of that magnitude and get any sort of reliable pattern projection out of it. Short-term, this stuff works like a charm. Long, long-term? No way.

But for those who want some real refuting evidence, how about this - the S&P 500 is the only major index to sport a possible double top. So would it be possible for this index to plummet while the other have no standalone reason to do the same?

In the stock market, we are blessed with enough ways to slice and dice things to make our own infomercial. Buy it now! Only three easy payments of $19.99! But because we have so many indices we must - repeat must - look at more than one of them to make macro-sized forecasts. The Nasdaq has not even come close to its 2002 low. Neither has the Russell 2000 and for the latter there is huge support awaiting.

No, I am not saying anything about where the bottom may or may not be. I am just saying that measuring a possible double top pattern in the S&P 500 is the wrong move. Even if we see a new low, it will not be the end of world as we know it.

3 comments:

patrick neid said...

Because of my current jungle local I don't have my Edwards and Magee at the ready. However if my memory serves me, on page 82(just kidding), monthly even weekly patterns over extremely long term frames have no forecasting significance.

I could be wrong but that analysis has served me well over 30 years.

Meanwhile I think the action in Citi and UBS, to mention a couple, will be instructive if there is to be another shoe breaking us through this glass support.

Here's a fun scenario. One or both go down for the count and we walk into a gap down that replicates Black Monday 1987 for a fat 20% putting us around 700 on the spooz. In one final move we duplicate 1974, 1907, 1987 and most of 1929. Now that's a market with a sense of history!

That would qualify for a panic low! While I hope I wrong I'm a little concerned with the formation over these last six weeks. I hate when they give me so much time to establish a position with such an easily defined risk. The market is generally not this accommodative. But hey, so far so good.

Leonardo said...

Isn't it a little too convenient to acknowledge short term paterns and refute those from long term charts? Or are we just burying our heads in the sand so as not to acknowledge what, maybe, many feel is the inevitable conclusion to this debacle? Tme will tell.

If we believe that markets display fractal properties, then ultimately, what differs between a 1 hour chart and a weekly one is not the degree of probability of a pattern to occur (those stay unchanged) but rather the magnitude. So, the further out one goes in time analysis, the longer it will take for a pattern to play out and the greater the move will be. Therefore, some patterns can take even years to complete by which time it is likely that participants will no longer be obeserving it, or may even have left the industry...

With regards to indeces going below zero, I agree entirely that it's impossible but only so far that companies that default get removed from the index. Hence why it can only got to zero.

kon said...

Bulkowski divides the height in half then subtracts from support; which gives approximately the same result.