Friday, May 8, 2015

SPX and INDU: Trying to Make the Complexities Simpler...

Lately the Fed has been doing something different, and no, I'm not talking about their personal hygiene:  They've been talking down the market.  Yellen recently stated that stock valuations were "quite high" (whatever that means).  I feel like I can barely remember the last time the Fed believed that equities were overvalued in terms of the broad market.  To my recollection, the last time that happened, a fella named Greenspan was involved in sort of an irrationally exuberant way.  (Yellen talked down "smaller firms" in social media and biotech last year, but not the entire market -- and taking shots at social media doesn't even count, because social media is virtually always overvalued.  As far as I'm concerned, anyway.)

So it seems that maybe, just maybe, the Fed has finally begun seriously considering the idea that it doesn't need to be quite so incredibly accommodating anymore.  Assuming the Fed stays consistent in that view and begins tightening, that will ultimately have an impact on the market. 

Of course, it bears noting that when Greenspan made his "irrational exuberance" comments in 1996, the bull market still had several years left in its tank.  But we are certainly in a different position now than we were then, and I have maintained for some time that we are in uncharted waters.  The 90's bull market wasn't launched (and then carried) on the back of Quantitative Easing; and neither was any other prior bull market in history.  So it remains to be seen how this current bull market ends, and whether or not it will end in a similar manner as previous bulls.

So, with that simple stuff out of the way, let's take a look at the charts.  As I've been continuing to note for several weeks, we're still inside a very well-traded range.  The trouble with trading ranges is that they create a ton of noise on the charts, and noisy patterns give the market a lot of options in terms of wave patterns.  It's thus becoming increasingly difficult to try and simplify the charts into something easily-understandable, but I've tried my best to do so.

What we'll do is start with some basic charts and work our way up in complexity.  First off, a simple near-term support and resistance chart.  This should be viewed with the understanding that near-term support and resistance grows increasingly weaker (and eventually meaningless) inside an old trading range:

For the bigger picture, this is the most simplistic chart I can come up with for SPX:

Moving over to INDU, we can see that the pattern is actually growing exponentially more complex, but I've tried to reduce all that into a few fairly simple concepts: (continued, next page)

Big picture, things still appear to be fairly simple, though, and there's been no change to this next chart since the Carter Administration:

And now back to complex, with another diagonal option that hasn't died yet.  Yeah, I know, bears were pretty excited that the previous diagonal died.  But we can't look at a market like this with rose-colored glasses and pretend that everything's completely straightforward, because it isn't.

Finally, the bear count remains as a decent potential, but the way this market has behaved for the past few months, that could all change tomorrow:

In conclusion, this is the most brutal trading range this market has seen in a few years, and that likely comes about because participants are unsure how to digest and assimilate the Fed's changing role.  Ultimately, despite all the noise, I've seen nothing yet that makes me want to abandon my basic thesis of the past few months, which boils down to the fact that I have yet to see anything that suggests the market is about to launch into a new trending rally wave.  This likely means that either the correction is going to stretch farther sideways and continue grinding up both bulls and bears, or we're in the process of building a top.  Trade safe.

No comments:

Post a Comment