SPX Review

I'm more than a little bit overdue for a post on the current status of the SP500. In my next post I will review my 2018 astro forecast and do a new forecast for 2019 however for now I will limit the analysis price structure, breadth and sentiment.

Price Structure:

There are a couple of things to consider here. The first chart below is a couple of days old now but it shows clear indications of both a momentum reversal as well as an acceleration down.

The next chart shows the point value of all of the major retracements in the market during the past 9 years. As you can see the current drop has exceeded every other retracement by a significant margin and again indicates that the trend has reversed. I have also highlighted the huge RSI and MACD momentum divergence at the recent high.

The two charts above paint a very clear and bearish picture that is also consistent with the astro forecast for an end to the bull market and a new 9.3 year bear market. However markets don't move in a straight line so for the shorter term perspective (which is also important) it's worth paying close attention to breadth and sentiment indicators for any warnings or useful information.


Market Breadth:

First up is a plain vanilla chart of the SPX with the NYMO, NYSI and BPNYA indicators. There are no divergences in play but the indicators may be at the low end of their range so more perspective is needed.

Next is the same chart but extended out to show a 5 year period. As you can see there is some correlation between the current readings of these indicators various market lows over the past 5 years, especially in January/February of 2016. Indicators don't necessarily work the same in bear markets as they do in bull markets and it is therefore also important to check the performance of these indicators in a bear as well.

First is the NYMO in 2008. I've marked two occasions where the NYMO exceeded the current reading and yet the market continued to fall. If you look closely at the data there are quite a few readings that are as low or at least comparable to the current reading (-100). Sometimes those readings marked the end of a decline (even if only temporarily) and sometimes they didn't. As a result there doesn't seem to be a threshold that can be used to both mark extremes and provide a useful number of signals.

Next is the NYSI in 2008. This indicator interests me mostly for the divergence signals but as you can see below the 2008 bear market produced very little in the way of useful divergence signals until almost the end of the bear market.

Next is the BPNYA in 2008. The current reading is 23% so I've marked horizontal lines at 20% and 30%. As you can see readings at this level in 2008 were not particularly uncommon and did include some lows if you look at a range, however a reading below 30 was often far too early to assist with bottom picking.

Next I would like to look at the NYAD ema20, because it shows things that other indicators just can't show. First is the current chart with the SPX. Again I like this indicator mostly for divergence signals but extremes can also be useful. At the moment the reading is -810

A check on this indicator in a bear market is also necessary. As you can see below it takes quite a lot for the indicator to get down to this level. I've marked three occasions where it was this low but where it was simply too early as a timing signal.

The last breadth chart to look at is the SPX new highs/new lows. Not surprisingly it is somewhat similar to the BPNYA chart and suggests that the current situation is similar to early 2016. More perspective is needed but unfortunately I don't have easy access to that data and given that there's only so many ways that you can crunch the same numbers I don't think that it would add any new information to the analysis here.

Sentiment:

The first chart is the RYDEX asset allocations. The trend does appear to have changed, downwards, but the indicator is in the middle of it's range and is not even close to indicating a low.

Next is the raw AAII sentiment data. Not enough bulls and an oversupply of bears, if this is a bull market you should buy now.

The next chart shows AAII as a ratio and shows it as perhaps at the low end of it's range.

Looking at the AAII data (as a ratio) in 2008 is not so clear however. As with the breadth extremes in the charts above you will find that an extreme reading can very easily be close to a low in time but not in price.

Conclusion:

1. The price structure clearly indicates that the bull market has ended AND that we can't expect some lazy 12 months of distribution before the bear market starts trending down in earnest. The bear market has started and it will pay to set up short positions sooner rather than later. This actually makes some sense given that the 2018 high has the signs of a bubble market top in terms of trajectory and valuations. It should not be unexpected then to assume that the bear market which follows will bring a fast, savage and immediate drop rather than a slow grind down to lower prices.

2. The market breadth indicators are showing levels that indicate the market is close to a low in terms of time, but not necessarily in terms of price.

3. The market sentiment indicators are telling the same story as the breadth indicators.

4. The current situation is extreme and yet anything is possible (especially given the astro forecast for next week). The most bullish scenerio is that the market rallies around 200 points before collapsing and the most bearish scenario is that the SPX will crash 500 to 1000 points next week. Anything in between is of course also possible. One thing that is almost certain however is that some huge downside is coming and the question is how to trade the markets based on that assumption.