Thursday, September 11, 2008

Channeling SPX Support

Earlier this week I referenced a conversation with my brother (another CFA) about downside support for the SPX going into the Fall. I stated that my "gut" feel was that strong support would be found at the SPX 1,150 to 1,175 level.

Recently, I have posted reasons why this may be so from a twenty-thousand-foot fundamental perspective, but since fundamentals have apparently temporarily been thrown out the window by many market watchers' account (no CFAs allowed), I decided to channel my "inner technician" to ascertain the roots of my intuitive conclusion.

Below is a multi-year weekly chart of the SPY. Note that we are nearly at the 50% retracement level of the Spring 2003 lows to Fall 2007 highs. It just so happens that level falls directly within the range of my guesstimate.


One interesting aspect of Fibonacci numbers, is that they can be arrived at by fractal sequences. Over decades of observation, the 3:1 fractal pattern has shown a strong connection to real world price action. While the sequences don't specify time frames, they eerily fit ultimate price levels.

Overlayed on the green price line in the chart above is a light blue representation of this fractal model, which is now near completion at this very same 50% retracement level (slightly off to the right of the scale).

While the indicated support range is just a hairs breadth below current levels, note on the other hand how a MACD divergence is setting up on the weekly time frame, suggesting a slowing in downward momentum and potential reversal ahead.

To further prognosticate when that low and intermediate reversal may occur, below I have projected forward in time a variety of capitulation indicators that I track based on the slopes of their respective current (negative) daily time frame trajectories. (See the chart above for more readable headers.)


Each one suggests capitulation lows potentially terminating this fractal cycle within the 50% Fibonacci retracement range by late September to early October, if not sooner based on recent volatility.

I don't want to attach more weight to this informal analysis than the fact of my posting may appear to imply, and by no means do I consider it a prediction. Again, there is no objective reason we must go there, though together we could undoubtedly list an array of fundamental reasons why we might. That said, the timing would be most interesting given September and October's notorious reputations, and right before the elections at that!

Nevertheless, I do find it a curious speculation and an interesting technical triangulation vis-a-vis my "instinctual" judgment of downside risk. Cutesy article aside, I'd also be curious to know whether my readers think it's all a crock (which I'm perfectly willing to pronounce), or perhaps has a deeper basis. Flame away!

Then there is perhaps the better and more pressing question of what will turn this boat around if we do go there. Maybe this week's Federal actions are a step in that direction... but for that analysis, I'm afraid I'll have to turn back to CFA mode. And that, dear reader, is fodder for a separate post!

Does that answer your question better brother?


Resource Note: For elaborations on a panolpy of VIX-based capitulation spread indices, I highly recommend Bill Luby's VIX and More blog site.

2 comments:

Jeff Pietsch CFA, Esq said...
This comment has been removed by the author.
Jeff Pietsch CFA, Esq said...

Thank you Dr. Brett for linking to this post. Now that we are in this zone, readers may be curious to know my most recent thoughts regarding this market environment, as found here:

http://marketrewind.blogspot.com/2008/09/091708-battle-to-hold-s1.html