Sunday, November 11, 2012

Predicting How Low The Market Will Go

A few weeks ago I posted a few bearish charts that made a very strong bear case, which is currently playing out (see chart 3). In the charts below I will give my estimates of how low I think the markets can go in this correction, using proprietary technical analysis. I will then show my market timing signal which is relatively new/experimental, and which has called for a bottom on Thursday. Finally, I will go over a few charts that suggest that this correction may not be as ugly as permabears would like.

Everyone is always interested in predicting how low the markets will go in a correction. The chart below is my attempt at measuring the magnitude of this correction. The red rectangle area is where I expect the markets should hold, assuming the 200 EMA does not hold. A clear break of the levels I have highlighted below will be very bearish, long-term, for the markets. I consider the markets holding above my target to be bullish long-term, below it, bearish. The targets below were derived from proprietary techniques which have been very accurate in the past.

predicting magnitude of correction

The chart below is my market timing signal that I have had for a few months. I think that based on the last 7 signals it may be worth paying attention to (I hadn't tracked it officially before then). I alerted about Thursday's signal; for now I think it is worth just observing. Be careful trading based on this indicator; it has not been proven and it is still in its infancy. I will post regular updates on this market timing signal on this site.

The chart below is the S&P 500, its 19/39 EMA, as well as its Price Oscillator. Two weeks ago I pointed out when the 19 and 39 EMA cross, as they did in May. There was a pause in the downtrend before falling down even more. This pattern played out again this week as the pause was over and the downtrend resumed further. What is also interesting in this chart is that the Price Oscillator was bumpy going up since the uptrend in June; it showed the bulls were not fully in charge (highlighted by the angled rectangle). This foreshadowed the current correction. However, the Price Oscillator is now in a downtrend; it is rather bumpy as well, meaning the bears also show weakness. This type of up and down weakness is probably foreshadowing the markets will be traveling sideways for a while.

sp500 price oscillator

The final chart is the Ratio Summation Index. The NYSI spent quite a bit of time above +500; for several months when this occurs, the market never makes a final price high at those levels. On the left hand side, the NYSI spent a lot of time over +500 before proceeding down.  What occurred was a bulltrap called a fishhook (named by Tom McClellan), where the S&P 500 made a double top and rolled over. A similar situation may play out soon (if the bearish case is correct), otherwise the uptrend may resume, as that is what this indicator is promising us. In summary, the last two charts (Price Oscillator and NYSI) give some hope that the markets are just correcting and may resume upward/sideways.

NYSI summation index