Archive for November, 2010

The S&P 500 short term is in the same condition it was as described in my last post.  This time, I’m showing on this chart how I use what I call Calibrated Curves, a subject that I’m devoting a whole chapter to in our upcoming book.

Compare this chart here with the one in my last post.  You’ll see that, in addition to Midas curve S1 there is S1 Calibrated; and S2 has been removed and replaced by S2 Calibrated.  Over the 15 years that I’ve been practicing the Midas method, I’ve observed that when a support (or resistance) curve does not capture a major pullback in price, one should move the starting point of that curve so that it does capture it.  Thenceforth, the new curve, called a Calibrated Curve, is very likely to capture important future pullbacks.  The two calibrated curves shown here have had their starting points moved in order to capture the pullbacks indicated at the little green arrows.  I will keep these curves on the chart as we go forward from here.

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On this daily bars chart, we see that the consolidation that I mentioned in my last post moved swiftly into a new downtrend.  On last Tuesday, price crashed down through S4 and S3, and pretty much held at S2, price closing above S2 on Tuesday and Wednesday.  So, price is breaking supports while holding below resistance.  This is the classic Midas definition of a downtrend.

So far, on the longer timeframes – weekly, monthly and quarterly bar charts – price has not moved far enough down to start new downtrends.  However, as I pointed out two weeks ago, price had come up to significant resistance on all of these timeframes, a most unusual occurrence, and now the short term has turned strongly to a downtrend.  So, I wouldn’t be surprised to see the downward motion continue and establish new downtrends on the longer timeframes.

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I’m updating here the daily bars chart from my last post, Nov 9th.  The TopFinder TF2 ended on Tuesday, Nov. 9th, so on this chart here I’m de-emphasizing it.  The end came two days after the peak on Nov. 5th, which is quite a good performance for a TopFinder.  Often, when a TopFinder is >90% complete, price tends to get rather volatile.

What comes after the end of a TopFinder is a consolidation, an often sloppy sideways motion in price during which there may be ups and downs.  The top of the consolidation’s range is the recent high price, while the bottom is the highest support curve in the hierarchy of Midas support curves that has been following the uptrend.  Those curves – S1, S2, S3 and S4 – are emphasized on this chart, each beginning at a significant pullback in price marked by the green arrow.  On this chart now, the bottom of the consolidation’s range is S4, and we see that last Friday, price came down to S4 and bounced up to the close of that day.

In my Nov. 9th post, I stressed the importance of watching for either a break up in price or a break down.  Those breaks are relative to this defined consolidation range that we’re still in.  So, going forward, we need to watch for either a break above the Nov. 5th high or a break below S4.

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We are now at an exquisitely important point in the market, as exemplified by the S&P 500 index, because price is up against multiple major resistance on all timeframes. This is something that is extremely rare and highly significant, so I’ll take the time here to clearly elucidate this in this blog post which is unusually long.  If you don’t want to read through this whole thing, here’s the short summary:  If price breaks up from here, we’re likely in for a major bull market on multiple timeframes; but if price breaks down, we’re probably starting a major bear market.

I’m showing four charts here, all updated through yesterday:  1)  Very Long Term – quarterly bars, 2) Long Term – monthly bars, 3) Intermediate term – weekly bars, and 4) Short Term – daily bars.  I’ll start this analysis with the very long term, then carry forward its significant resistance levels onto the next shorter term chart, and will continue that way through all of the charts.

Very Long Term – Quarterly Bars

The first chart here is the S&P 500 on quarterly bars from 1972, with price on a log scale, and the horizontal axis time based instead of my usual equivolume display.  Also, the S/R curves and the TopFinder are all calculated with the assumption that the volume is the same for all price bars.  The reason for doing this is too long and complex a subject to go into in this blog post; I devote an entire chapter to this in our forthcoming book.  For now, suffice it to say that for this timeframe, it works better this way.

Notice the two red R curves launched from the tops of the market peaks of 2000 and 2007.  They are now very close together, at 1251 and 1264, and price is very close to touching them at 1227.  So, price is encountering major resistance, meaning a break above these R curves would signify great strength and likely much higher prices.  But, a turndown from here would signify a new bear market on this timeframe.  Also, notice the upper and lower panes, where both the RSI and the MACD line are strongly diverging down from the price, implying future market weakness.

Long Term – Monthly Bars

The second chart here is the long term one with monthly bars, starting in 2002.   I’m returning now and on all subsequent charts here to equivolume charting with the Midas curves calculated with real real volume data, and price on a linear scale.  The two horizontal red lines mark the vertical levels of those two R curves on the very long term quarterly bars chart.

We see that price is now up into a cluster of three closely space resistance levels, the first being that of the Highest Resistance curve at 1217, the next being the horizontal level of the April high of 1220, and the third being the 61.8% Fibonacci retracement level at 1229.  Clearly, the Fib levels are important on this chart since the 38.2% level perfectly supported the July pullback whereas the Midas S2 curve did not.

Price is now into this cluster of resistance.  So we must say the same conclusion for this chart as we did for the very long term one:  ”a break above these R [levels] would signify great strength and likely much higher prices.  But, a turndown from here would signify a new bear market on this timeframe.”

Now, we’ll cary this cluster of R levels, along with the two R levels from the quarterly bars chart, over to the next shorter term chart.

Intermediate Term – Weekly Bars

The third chart here is of the intermediate term, with weekly price bars, starting in January of 2009.   Shown here are the five resistance levels that were identified on the longer term charts.  Obviously, the same conclusion applies to this chart as to the monthly bars chart.

Short Term – Daily Bars

We see here more clearly that price is right in the midst of that cluster of resistance levels, and yesterday started to turn down.  (So far today, Tuesday at 11:30 am, price is meandering around with little change.)

See my last several posts here for the discussion of the TopFinder on this chart.  Right now, it is 97% complete, with only a day or two more to go, so this short term uptrend is over.  This means we should expect at least a brief consolidation before price decides what to do next.

Obviously, the same conclusion applies to this chart as to the previous three.

Summary

See the first paragraph of this post.

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In this chart here, as of last Friday’s close, we see that during last week, price edged somewhat higher, and on Wednesday it spiked down and bounce up off S3, so the uptrend is still in progress.

The object lesson here now is to see what’s happening with TF2, the TopFinder.  In last week’s chart, you see that TF2 was fit to the pullback of Oct. 4th, at the large arrow.  Now in this week’s chart, we see there have been two more significant pullbacks, at Oct. 19th and Oct. 27th, marked by the 2nd and 3rd large arrows here.  Those later two pullbacks don’t quite fit TF2, but are close.  In accordance with the directions for using TopFinders that I’ve written in our forthcoming book, what I’ve done on this week’s chart is to adjust D, the duration of the TopFinder, so that it fits the three pullbacks as closely as possible.  I found that raising D from the original 20.2 million shares to 22.4 million makes the Topfinder slightly undershoot the first pullback, slightly overshoot the second one, and exactly fit the third one.  This is a very good readjustment for the TopFinder, and likely to work well to its end.  The far right vertical purple line is at the horizontal location of the expected end of this TopFinder, which is several days later that the first fit we had.

This procedure of readjusting the TopFinder works well when the pullbacks are close enough to get one fit that works for all of them.  Here, the first two miss the readjusted TF by only about 1.5 out of about 1150 on the S&P 500.  However, if these later pullbacks were at such different levels that such a close compromise fit couldn’t be found, then we would have to put on a new TopFinder fitted to the later pullbacks, while keeping the old one on the chart, and watch how price evolves.

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