Slope Of Hope with Tim Knight

Survivorship Bias (by Consistently Incredulous)

I tripped across a Standard & Poors announcement last week that CBOE Holdings (CBOE) will replace Temple-Inland (formerly TIN) in the S&P MidCap 400 index as International Paper (IP) (S&P 500) completed its acquisition of Temple-Inland on February 13th.  This reminded me of a good Seeking Alpha post I read last year about Survivorship Bias in Index Performance.

I highly recommend the full post; but in a nutshell, survivorship bias in the indices:

“Specifically, in the process of rebalancing (selecting and or deselecting stocks) the indices it is the tendency for failed companies to be excluded from indices because they 1. No longer exist, 2. Their market capitalization has fallen or 3. Their industry is in decline (which likely caused the first two reasons); this is considered Type 1, survivor bias. Inherent in this type of bias is the error you make in just counting the survivors.”

Topping is a Process (by Springheel Jack)

That was a very nice day for the bears yesterday until the rally in the last hour wiped out the day's losses. Overnight ES has broken to a new high and so far the broken resistance area at 1352-3 is now holding as support. Technically however, despite all the drama, nothing much has changed on the SPX chart apart from a double pinocchio of support from Dec 19th that is suggesting a bigger break downwards soon. Short term I have trendline resistance in the 1362 area, and support is now in the 1344-5 area. The 2011 high was at big resistance in the 1370.6 area and that isn't far away now:

An Ongoing Balloon Ride

Weather balloons may reach stratospheric altitudes of 40 km; well-over double the standard altitude of most commercial jets.  Diminishing pressures at these altitudes cause the balloon to expand to such a degree (typically by a 100:1 factor) that it disintegrates- leaving the remains to fall back to earth.

For those of you who can recall middle/primary school science class, the Earth has five principle layers in the atmosphere.  The two closest to the ground are the troposphere (up to 20km) and stratosphere (20-50km).  Most of the phenomena we associate with day-to-day weather occur in the troposphere, including clouds; which stop at the tropopause- the border between the troposphere and stratosphere.

Since the October breakout, and subsequent retest, the SPX has remained well-above the clouds and the 400day MAs since November.

The question is – has price broken the tropopause?  Or is there more room overhead as, much like the troposphere, it is variable depending on latitude (which in this metaphor is a bull/bear market)?

Just eyeballing the SPX altitude since 2007, we have had 3 instances of a significant post-altitude drop (purple boxes) and 4 instances [or 2 long ones…] with only minor pullbacks (orange).  Notice the rising Senkou parallels such a price rise, and is doing so again today:

I don’t think anyone questions if this debt-filled balloon will disintegrate, but when.  Given that we’re probably approaching the stratosphere- I closed all longs today.  I would be more comfortable entering long again on a small pullback, but would hesitate to short until the full cloud is breached.

 

 “One minute you're up half a million in soybeans and the next, boom, your kids don't go to college and they've repossessed your Bentley.”

Bearskin Rugs (by Springheel Jack)

I was joking on twitter yesterday morning that the short-term bearish setup I was looking at looked very tempting, even if people were having to climb over piles of bearskin rugs to get to the screens to see it. Needless to say there was a report early in the day that the Greek are very close to finalising their no-default default, and both EURUSD and ES broke up hard to trash that bearish setup. This market remains in a strong uptrend and JBTFD is still the order of the day.

It still looks early to think about a top on EURUSD and GBPUSD at the moment. I've been posting my big picture USD chart and the obvious target is a hit above 76.72 in mid to late February. I can't see any reason to doubt at the moment that we will see that level hit, and at that point we will see if that rising channel on USD can hold:

Teasingly Ambiguous (by Springheel Jack)

It's often tempting to anthropomorphise the markets, whether describing the movements of the markets, or referring to the dark forces that some feel are manipulating the markets behind the scenes. I don't subscribe to the latter view, as I think that the force manipulating the markets is doing so quite openly, and that force is the Fed, helped by other central banks, keeping interest rates negative and flooding the world with new money in the expectation that rising asset prices will boost the real economy. I do sometimes anthropomorphise the market however, and this week the market is being a tease.

I mentioned yesterday morning that a break above my SPX declining channel would open the way to a test of the highs and that was what we got, to within three points. In terms of direction that resolved absolutely nothing, as the failure at the afternoon high on SPX was a lower high, a potential double-top, and a second test of declining resistance from the 2007 high. Here's the updated big picture SPX daily 6yr chart:

Retracement, Interrupted? (by Springheel Jack)

A very annoying feature of this move up since the December 19th low is that the retracements have been shallow and, mainly in consequence, no strong support trendlines have formed. This was looking very good to be the first decent retracement this year, with a clear target trendline in the 1275-85 SPX area (depending when it was reached) combined with a pullback on EURUSD that also looks overdue.

I posted an ES chart on twitter last night that showed the ideal setup there and that was on the 15min chart below:

Trendline Voids (by Springheel Jack)

I've called the last few significant interim tops and bottoms on SPX well, but those all had something in common that we're missing here, in that they all had clear trendline and/or pattern setups. As I have been grumbling almost daily for weeks in my morning posts, that is not something I'm seeing here as yet. We don't always get decent trendline setups of course, but often when I haven't been able to see them in the past that has been because they have not yet been established, as the trend has a lot further to go. That is something that is very much on my mind here.

Short term my SPX target at declining resistance from the 2011 highs has been hit, and this is a good place to expect at least a short term reversal. Immediate support is at the pre-market low at 1299.5 ES and that is a possible neckline for what could develop into a larger reversal:

Bear Sentiment at 6 Year Low (by Springheel Jack)

I'm going to be posting a lot of bullish charts today, so I'll balance that by leading with a bearish big picture chart. That chart is of the NYA Composite, which is a very broad based index including all stocks listed on NYSE, with the exception of some ETFs etc. On this chart you can see the huge H&S building that I have posted before, and it's also worth noting that NYA has not yet reached the October high, which is very strong resistance as it was also the H&S neckline for the topping H&S last year. A lot of analysts are changing to a bias that a new bull market is in progress but I'm not one of them yet, though I am most definitely weighing the evidence that it might be:

The Bull Case (by Springheel Jack)

I'm going to take a little time today to put the case for the new bull market from the October low. Negative divergences against equities here are very numerous, and for that reason bear market continuation looks more likely to me, but it would be a mistake to think that the bulls have no case here, and I'll be outlining what I see are the main planks of that case from a technical perspective.

In the short term support on the ES rising channel is clearly still holding, and until that breaks there's not much to see on the bear side here. The upper trendline of the channel is in the 1312 area, and ES has moved up an impressive nine points in the hour since I capped this chart to beat the last high. There might be more coming. Channel support is at 1282.5 this morning:

An Interesting Spreadsheet

In prior posts, I've mentioned the interesting comparison of the $HUI gold index between 2006-2008 and the past couple of years. Below is the grid chart showing the past behavior on top and the recent behavior on the bottom. The analog speaks for itself.

Instead of just eyeballing the charts, I entered the dates into a spreadsheet of the difference in time between the major turning points. The length of time is quite similar, although the present instance is just a little shorter (95.5% of the length) that the prior one.

The interesting thing is calculating what this adjusted delta yields in terms of a "start date" for a breakdown in the pattern. The date turns out to be January 21st (a Saturday, but hey, it's just an estimate).

Can we count on some kind of hard fall starting then? Of course not. But at least it pinpoints a day for this analog to see if some kind of breakdown does indeed occur around then.