Thursday, January 19, 2012

A Bend In The Road?

The last two days were really hectic with no internet connection and fifteen hour flight etc. As such I could not post anything and my apologies for the absence.

In the mean time, the stock market in USA has been a one way street. It has so far defied all logic and divergences. It has gone from extreme to further extreme. But such extremes are not backed by any fundamentals. We all know that seasonality pushes the stock prices higher at this time of the year but usually there is a correction during mid-January which has not happened yet.

I was looking for SPX 1300+ during the 1st week of January but it did not come then. I was also expecting a mild correction and continuation of the rally in the 1st week of February. So far the correction has been elusive. The problem with such situation is that without a correction not much upside can be expected in February.

I wanted to check if my models are totally wrong or are they just ahead of time. (Just like Prechter!) One of the best ways to check is to find out what other Gurus are saying. These are the people who have track record little better than Prechter and while nobody is correct all the time, it is better when success rates are higher than failure rate.

So I first turned to Charles Nenner. According to Mr. Nenner the short term upside price target for Emini is 1312. And today ES reached a high of 1311.5. We will see if Mr. Nenner is right this time.

Next I turned to Tom Demark. He gave an interview in Bloomberg on December 22nd. You can view it here; . His upside price projection for SPX is 1313-1340.But he also expected to reach this target by the 1st week of January. One interesting point made by him is if SPX takes out the high of October 27, then it will create three successive high and that will be the top. We have now satisfied his two conditions for a top. We have reached the upside price target and SPX has created three successive highs as seen in the following chart.
Another person who makes a very good use of analog is Eric Swarts. The following chart is from him.
According to his analogy, the top was in today with pull back imminent before a final push in February. That fits well with my original model.

I also wanted to see what FX is doing. AUD has been my favourite indicator for SPX with a very high (almost 99% in 2012) correlation.
From the daily bar it seems that an AUD/USD top is either in place today or will be with one more try. It is at the falling resistance level and at the top of the triangle.
On the other hand USD has been falling from the start of the year and has now created an inverse HS pattern. The DJ-USD index support is at 9900 level and it seems that support is going to hold. While I do not expect DJ-USD index to run away over 10200 levels immediately, I think it will test the neck line as early as next week.

Bottom line, I am continuing with my short position. There are times when the model gets extended and I think now is one of those times. So instead of looking for the bottom by 20th January, I will now look for a short term bottom by around 24th – 26th January and then go for final pop in a long while by the 1st week of February.

Thank you for your encouraging comments and emails and for visiting .Please join me in Twitter (@BBFinanceblog) to get an unbiased market analysis filtered of noise. Share it/ forward it/ retweet it to your friends and circle. We will see how the market goes in the next few days but we will prevail. For now let me catch up with some sleep.