Thursday, August 16, 2012

SPX Update: Beta Chasing Reaches Historic Highs

This remains one of the more challenging patterns I've seen in a long time.  Every type of trading system runs into challenges at times, and all the technician can do at such times is make a hypothesis, then back off a bit and see how the market responds.  Based on numerous indicators which have issued sell signals recently, I've made the hypothesis that the market is forming an intermediate top.  Now it's up to the market to either prove or disprove this hypothesis.

The first indicator I'd like to share is one that I've shared fairly recently: the Nasdaq total volume to NYSE total volume ratio.  This ratio has now reached an all-time record high, and this suggests that investors are chasing beta -- which indicates that sentiment is very bullish.  Extreme bullishness is often seen at the end of rallies:  when everyone's bullish, who's left to buy?

The next chart is one I studied for a few hours last night: it's the ratio of the S&P 500 (SPX) to the iShares Barclays 20-year treasury fund (TLT).  What I found is that divergences in this ratio often coincide with meaningful turns in equities -- and over-bought readings in RSI here seem to lead, or coincide with, market tops. 

There isn't enough history behind this indicator for me to be certain what the huge year-over-year divergence that formed between the 2011 highs and the 2012 highs means (TLT hasn't been in existence long enough), but it seems to suggest that a more meaningful turn could be underway.  There is also a divergence forming with the present market and the 1415 print high.  In any case, I felt the chart was worth sharing -- feel free to draw your own conclusions. 

Note the potential head and shoulders forming since the 2011 low.


The next chart is the SPX 30-minute, and the outlook here has remained essentially unchanged for several weeks.  In the last update, I suggested that higher prices were probable over the short term, and this occurred on Tuesday -- however the market fell short of the target of 1415-1421.  The short-term wave structure is entirely unclear, and I simply don't know if that target will be reached or not.

In either case, I do strongly suspect that the chop of the past couple weeks is nearing an end, and that the market is finally ready to break away from this narrow trading range.  I expect the market to begin a direction move within the next couple sessions.

Next is a 5-minute BEST GUESS.  A number of readers have asked me to provide these, and I'm applying a slightly different wave count to this structure vs. the last 3-minute chart I published, because, quite frankly, the short-term is a complete toss-up.  This count considers that this whole sideway/up wave is a small ending diagonal.  In a perfect world, I'd prefer to see the (ii)-(iv) trendline unbroken -- but hey, it's not a perfect world.

The question is still whether (5) is complete or not.  Keep in mind that if the overall outlook is correct, then an intermediate top is forming, and we simply may not be able to figure out the to-the-penny high at this stage.

Next is the same chart without the speculative count.  Many short-term traders will be watching only the lower red trendline, but the blue channel has been established with four alternating touches, so the first step toward short-term control will come with a breakout or breakdown of that channel.

In conclusion, I continue to feel that the number of meaningful top signals here must be taken seriously.  The funny thing is, though these indicators have worked well historically, I've been conditioned over the past couple years in this QE Wonderland market to doubt these readings.  Be that as it may, I feel the historic odds require that I continue giving preference to the idea that an intermediate top is under construction.  And if my hypothesis is correct, the move should finally be nearing completion.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.


  1. Great post PL. One thing to note is no QE till after the elections, I'm pretty sure. Republicans would certainly want Bernanke's bearded head on a pike if they did anything (perceived) to help the economy between now and election day. And half the Republican party already wants to abolish the Fed and go back to using sheep for money or something like that.

    Historically it seems they've sometimes announced plans at Jackson Hole conference to do something after the elections but I'd be surprised if there's much in the way of news-making there this year, given the political climate and the state of the domestic economy. But of course as you said, we've all been surprised before.

  2. Nice analysis, Also the CBOE total put/call hit a recent low of 0.75. Last time it hit this level was April 25 2012. So caution regarding going long. It looks like those going short are giving up more than bulls when looking at volume so the 'sharket' (my word for market) mat squeeze bulls first when enough volume has gone long at these levels. Then a short squeeze for the final run up?