This is the second in a series of four blog posts on the current trend status of the S&P 500, using the Midas S/R curves for analysis.  See previous post for definitions of timeframes.

Different on Different Timeframes

Having read my previous blog post here, you may wonder why I’m going through all this discussion again about whether or not this is a new downtrend; after all, didn’t I already establish in the last post that this is indeed a downtrend?  That last post was all about the short term timeframe, a chart of daily price bars.  The market is fractal in nature, and can and often does go in different directions on different timeframes, simultaneously.  The fact that the market is down on a daily bars chart means nothing about what it’s doing on a weekly, monthly or quarterly bars chart.  Each one must be analyzed separately.  And that’s the program of this series for four blog posts that I’m now half way through.

Which one of these timeframe charts should you “believe”, and follow for your trading?  That depends entirely upon your typical holding time for a trade.  If your trades typically last anywhere from a few months to several quarters or so, then this weekly bars chart is your primary chart.

New Downtrend

In this weekly bars chart of the S&P 500, from July 2008 to the present, we see that this past week was a strong continuation of the breakdown below S3, the highest support curve in the hierarchy of Midas curves that tracked the uptrend from last March.  Usually, I wouldn’t declare that such a breakdown alone defines a new downtrend until a pullback in price stays below the new R1 curve.  And indeed, such a test may come and invalidate the claim that this is a true downtrend instead of just a consolidation after a long uptrend.  But, price motion has been so strong over the past three weeks that I’d say this probably is a new downtrend.

In the upper pane, I’m showing the Ease of Movement (EOM) indicator, which was developed by Richard W. Arms Jr., the same fellow who created the Arms Index.  The EOM is his trend direction indicator, positive being uptrend and negative, down.  The crash of ‘08 so severely depressed the value of this indicator, exceptionally deeply into negative territory, that it wasn’t until last July that it finally read positive for the uptrend that actually started in March.  Usually, this indicator hardly lags at all.  So, look at it now; it has gone negative already, which I think justifies calling the present situation the beginning of a new downtrend.

Of course, if price goes up and breaks above the New R1 curve, then this has not been a downtrend, but just a consolidation.  And if it breaks above the January high, then a new uptrend has started.

Supports to Watch

The uptrend from last March spawned a three-fold hierarchy of Midas support curves – S1, S2 and S3 – shown here.  S3 has already been penetrated, so we should watch for possible support at S2 and S1.

The downtrend before last March, which extended from ‘07 to ‘09, spawned a four-fold hierarchy of resistance curves, the last two of which are shown here.  The significance of these two old R curves is reinforced by the fact that each one provided support or resistance during the recent uptrend, at the points marked with those red and green arrows.  So, these are not only primary curves but they are also what I call “calibrated” curves, by virtue of their subsequent captures of price extrema.  Thus, they are very significant curves going forward.  Since price has gone above both of these old R curves, they will act as support if and when price comes down to them.  This is why they are included in this ladder of support levels that sits below the current price.  Any one or more of these four levels is a likely place for a pullback from this downtrend to start.

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