Interactive Widget --SPY Mimics S&P 500

Tuesday, November 1, 2011

Tuesday Nov 1

Welcome to a new month.  The Major indexes all took a deep dive at the opening today, made a couple of attempts to recover, faltered, and all wound up close to the early morning lows.  Losses were 2.5 to 3%.  Coupled with yesterday's similarly shaped performance, this could be the beginning of another crash.

Blame it on Greece? Hell, you might as well blame it on the bossa nova.  The Greek situation cannot be a surprise to anyone who has been paying the slightest bit of attention and also has a couple of toes planed in reality.

Or not.

If the European rescue falls through and Greece defaults on its debt, the ripple effect would be global. Europe could fall into recession, hurting a major market for American exports, and banks could severely restrict lending.

It was only last Thursday that European leaders announced a deal that they believed would be a turning point in the two-year debt crisis. Banks agreed to take bigger losses on Greek debt and to boost their levels of cash, while the European Union increased the size of its bailout fund. Global stock markets surged after the plan was unveiled. Now, those gains seem to be fleeting.

"The stock market is expressing disgust with Greek politics and a lack of confidence that Italy and Spain will generate the growth needed to pay down their debt," said Peter Boockvar, equity strategist at Miller Tabak & Co.

On the other hand, maybe they don't read Krugman.  Whatever.

Here is a chart of daily ranges in the SP500 Index since the beginning of July.  After a deep plunge, it's been basically sideways for three months.  What can we make of it?  (Click to enlarge.)

Trend Channels

Stocks staged a terrifying drop in early August, which was the first line of a broad "W" formation which seems now to be complete.  (I'm not suggesting the "W" shape has any inherent significance - it's just an observation.)  This does give us the opportunity to look at the channels that the stock movements have defined.

The initial drop traced out a narrow channel, constructed by placing a line across the tops, then dropping a parallel line across the bottoms.  I constructed the blue upward-trending channel the same way, (which is not technically correct, since that should be done be connecting the bottoms.  Oh, well, you have to be a bit ad hoc at times; and since the lines are strictly parallel, it hardly matters.)  Another red down channel followed, and then the steeply upward green channel.

Let's pause and think about all this Greek stuff in the context of the chart.  Could that have caused one big day as the up-trend was exhausted, and then, conversely, two days of steep declines?  Believe that if you want too.  I find the proposition very difficult to swallow.  But people get paid to make that stuff up, and if your perspective is only a few days, ignorance of a bigger picture can make you susceptible to spurious assertions.

Back to the chart: for three of the "W" channels, I've also included a midline in yellow.  In the blue channel, the midline seems to offer a bit of temporary support/resistance from time it time.  Ditto, for the green channel.  Interestingly, in both of those cases, the trend faltered right at its own midline.  

To put a bigger perspective on things, I've added the outer purple trend channel, framing all of the other details. That couldn't be done until the recent top was defined.  Note that the bottoms of the "W" very cooperatively touch the bottom channel line.  Note also that the midline of the purple channel (even before we knew of its existence) was a support/resistance line.  The break of the blue channel where three midlines converge is especially intriguing.

Several weeks back, I thought that the break through the bottom of the blue channel signaled the next down phase.  This could well be the case now, but it will take a convincing break of the purple channel to validate that notion - somewhere around 1050, I suppose.

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