End of the Year Analysis E-mini S&P500 (ES)

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Chart Analysis

As you probably already know, we believe that charts (and all Technical Analysis) have zero predictive value, because charts are just showing past data and unless this data is used as a statistical predictor, the act of projecting all sort of visual fantasies (patterns, trends, etc.) or our bias, onto a chart, it’s just an exercise in self-delusion.

However, from time to time we like to throw in a chart or two to help the reader visualize where our levels are in comparison to the market current price, or to visualize the recent market action in relation to our levels. As this year 2014 is closing, we’d like to look at a SPX chart of the last 50 years (below).

We have pointed out the bottom of the Bear Market in March 2009, because that was when a lot of people started to say the market was going to zero (!). And then, we have pointed out the price area where, during winter 2012, the chart analysts did see a “triple top”, a visual chart pattern that sometimes appears before a correction, unfortunately no Bear Market followed this time and actually the market skyrocketed +500 points higher making new all time highs. Now here we are in 2014, well above the 2000 mark, and there is people starting to say the market may go to 3000 in the next few years, a sort of repetition of the parabolic market rise in the 90s. If we look back at the crash of 1987, it did look like a shocking event at that time, now it is just a blip in the rally performed by the SPX through the last 5 decades, so it’s not impossible that the Bear Markets we have witnessed in 2000-2003 and 2007-2009 where just blips on the way to 10,000, but we are certainly not going to engage in such predictions. We leave them to chartists and gurus, as they are experts in these things.

Multi Year Chart SPX_2

What can we conclude from all the above? Well, first of all that making long-term trend predictions is not recommended, no-one knows what is awaiting for us in the future. Bull or Bear Market, inflation or deflation, you name it. What we can do, is to predict market trend extensions with statistical analysis, comparing past trends and current trends and that is in fact what we do with our RL models. We do not know if the market can go to 3000 in the next few years, it’s possible if all of a sudden a lot of investors, after staying on the sidelines since 2009, decide to join this 5 years long rally (how about that for a “confirmation signal”?). What we do know (based on our statistical models) is that the market is overbought right now, and it has been rising ~500 points in the last 2 years, although the strongest rise was in 2013, and in 2014 the speed of advance was a little bit slower (maybe a sign that the rally is faltering?).

In our view, this strong pace is not sustainable in the long term and some correction inevitably will come, although it does not have necessarily to be a 3-years Bear Market, it may be a 3 months correction, or a quick crash followed by a recovery, etc. What we can do is to gauge the market trend extension from a TIME and PRICE point of view with our model and this is an honest method to gauge the short and medium-term market direction. Then, if we are SHORT and a large correction sets in, we have to be good enough to ride it to the bottom and that is a scenario where our LONG models can help, signaling when a sell-off is statistically oversold. So let’s have a look at the current situation to figure out where the market could go from here, and more specifically we want to have a look at the SHORT model.

CCOC – Consecutive Closes Odds Calculator (TIME EXTENSION ANALYSIS)

The TIME EXTENSION ANALYSIS model below shows “0” on the DAILY time period gauge. WEEKLY and MONTHLY gauges are showing 2 consecutive up closes (the MONTHLY refers to the end of November and this month is currently closing up, barring last minute surprises, so if we have 3 months up at the end of December that will add weight to our bearish outlook for the market). January is a season where the market often rallies, so it’s not granted we will have a MONTHLY correction in January, we may have to wait further from a TIME EXTENSION point of view, before we can see a MONTHLY Close down, but the PRICE EXTENSION model will help us to gauge the limits of the current uptrend. TIME and PRICE EXTENSION information must be combined together for best results in predicting the next market move.

RL – Retracement Levels Odds Comparator (PRICE EXTENSION ANALYSIS)

Looking at the PRICE EXTENSION ANALYSIS model below, we have highlighted the 2097.75 level below as that is the DAILY level matching our selected OVERBOUGHT WEEKLY/MONTHLY levels. In 74.33% of the cases the index does not go higher than this level on a DAILY impulse, during this type of retracement pattern.

The WEEKLY time period offers good resistance at 2103.75: in 56.82% of the cases the market does not go higher than this level during this type of WEEKLY retracement up pattern. 

The MONTHLY time period needs to see the market at 2131.50 to offer a matching level to the 2103.75 level WEEKLY. In 81.08% of the cases the index does not rise beyond the 2131.50 level during this type of pattern. Keep in mind that on a MONTHLY time period when the odds are beyond 75% it means the market is massively OVERBOUGHT. If you go SHORT there the odds are in your favor, however it is not possible to say if the market will immediately give up a good part of the recent gains or if it will stabilize in this area for some time (e.g. 2-3 weeks) and then fall down. You can only insist going SHORT when the odds DAILY are good and match them with the WEEKLY and especially the MONTHLY odds because this latter time period offers larger price retracements (=potentially more profitable).

Summing up: there is good DAILY+WEEKLY+MONTHLY resistance in the ~2100 area. A MONTHLY correction would be expected from there, however as we enter January, rallies are also possible and so some patience will be needed to be able to reap a profit on the upcoming “correction”. If you are bullish, use the SHORT WEEKLY and MONTHLY to avoid overweighting your assets at these quite overbought levels. Holding existing LONG positions doesn’t hurt, while adding new positions at this mature stage of the rally may be a bit of a gamble.

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