Looking at the current market in the SPY I was drawn to a similarity between the most recent activity and where we stand at this juncture. This is by no means a prediction of any sort, just a curiosity that I believe may signify an important level that our market currently finds itself.
First, take a look at the time period of October 2007 and compare it to where we are at the moment. Five main components exist; (1) There was a primary trend in place (both of which bullish), (2) Price sold off from it's highs at a previous resistance level (in the case of Oct. '07 it was the highs from March-Sept., while recent resistance extends back for quite a long time, see this post), (3) Price put in a higher swing low on it's move down, (4) we had a re-test of the previous highs, and (5) Price then rallied, exceeded, and closed higher than the previous highs.
Seems innocent enough, and perhaps may appear as a non-correlation. However, the Oct. '07 behavior demonstrates a supply/demand exchange where exuberant buying by "weak" money feeds right into the heavy distribution of the "smart" money.
Now take a look at daily charts with volume of these two events:In both instances there is relatively large volume on the down move, with a volume capitulation spike at the lows rocketing price back to (and slightly beyond) the highs (39-days in '07, 29-days most recently, so far). All in all, very similar structures in both price and volume (inverse Head & Shoulders with weak volume in the Right Shoulder compared to that of the Head and Left Shoulders).
Now take a look at a broader perspective of this market and what happened prior to the '07 top in SPY, more specifically what price did off the bottom in 2002. Going back to 2002 the SPY bottomed before climbing 32% in a 52-week period.
I chose the point that I did for my beginning measurement for the following reason:
The market at this particular time put in a triple bottom (or, arguably a reverse Head & Shoulders bottom) where the 3 low points all came within 2% of each other. So, I chose to measure from the point where selling finally turned over and buyers decisively stepped in, giving impulse to price. Whereas the case with the 2008 lows, price formed a "V-bottom" and the price impulse never looked back, gaining 42% in 53 weeks (so far). If one prefers to measure from the absolute bottom in 2002 we would be looking at a 74-week recovery of roughly 35% before hitting resistance (at the price we currently find ourselves) and consolidating into a shallow flag retracement.
What's striking to me is this resistance level now happens to coincide with that back in 2004, and look how much upside was left once price cleared and tested the Resistance-come-Support level!
So, it would seem we're at a very telling juncture (though it may take months to resolve itself). Do we fade off of this $116 area and consolidate for a while only to break above, retest, and continue higher?
Or, do we go the way of the 2007 2B Top highs?
The former will develop over time, while the latter may be more fierce and volatile.
The setups I include on this blog are used in conjunction with the 3/10macd and the criteria I ascribe to it as a way to alert me to an existing condition of price. The key concept to take away from this blog is that I try to anticipate what will happen on the higher time frame by using a faster time frame to trigger the trade setup. I do not trade a "system" I use two indicators to clue me in to price conditions. Please read the Disclaimer located in the sidebar of this site. I can be contacted via email at firstname.lastname@example.org
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