SPY Lower Lows and Lower Highs just like the 1975 Time Frame

spy2010129

So far the market as represented by the SPY ETF is behaving in a somewhat similar manner to the decline that occurred in 1975 time frame.  I mentioned in a previous post about how I was curious to see the nature of the price decline this time around to see what kind of bear market animal we are dealing with (1929 style or 1975 style).

So far anyway my read of the tape action suggests that we are in a 1975 style market.  We are trading in a similar manner with persistent lower highs and lower lows.  If you look carefully at the 1975 decline you will see that almost the entire decline did not give shorts a good chance to re-short the market.  You really would have had to go short near the top and then stay short.

Looking at the chart above you really have to look into the nuances of tape reading and study the price reactions near support and the volume at those levels as well.

  • First, the price REACTION on the SPY near channel support and near the yellow dotted supporting line has been lackluster.  Usually when you see price drift around a supporting channel or support line like that too long, it is not a good sign.  Best is to see a quick reaction off the supporting area to show new demand and reconfirmation of trend.
  • Second, we are still trading in a range with lower highs and lower lows
  • Third, the volume near the channel and support area has been extremely high (relatively speaking) and dealt some major hits to channel support and horizontal support.
  • Not only was the volume high near this key channel support area but price also busted through it briefly. So the combined effect of the price damage and high volume weakens the channel line and suggests it could eventually break.
  • The recent trading action of the last 5 days or so appears to be of the ‘rolling correction’ type which would be a sign of internal weakness.

Whether or not we continue to mirror the 1975 style remains to be seen but so far that is my read of the market.  Looking at the chart below you can see that there was barely a chance to get short a second time during that decline.  One could have made the decision to just ‘jump in short’ during that decline, but that is usually not the preferred type of ‘re-short' setup that most traders would like.

Today’s GDP one day intra-day pop may be one of those ideal opportunities to get short again.  I think it is a mistake at this point for shorts to be expecting very significant extended upside rallies.  They may still come, but from much lower levels.

I find it very interesting that the market so far is not giving easy opportunities for people to get short again.  This type of behavior is the 180 degree exact opposite of what we saw during the entire rally period of March 2009 to January 2010.  Why should the market give the shorts another easy entry?  In typical fashion the market is not ‘giving us’ what we want.

The ‘China like GDP Growth’ news we got seems seems to be a ‘sell the news’ type of event and is definitely not leading.  The market wants to lead us somewhere else, namely down 🙂 .

sp50019750129

Initiating a new short position or added short position near this channel supporting area is not a bad idea in my opinion.  Key is to use tight stops near the channel area.  Perhaps the best thing to do is wait for Monday next week confirmation that the next leg down will begin right away.

Today is also the last day of the month of January and so we have the final closing monthly candle leading into February.  It looks bearish enough to me to suggest that the first couple weeks of February will be down.  So the weekly bearish trend remains in tact.

Trading the volatility of the last days and weeks can be really difficult.  I have traded in and out of the TZA because I, like many others have been expecting the much awaited bounce to get another good entry.  It has been a whipsawing experience.

I am long the TZA again going into the next couple of weeks and will look for confirmation early next week that the next down leg has begun.

If the first two weeks of February do not show significant downside price action in the broad market, I am going to be very surprised. 

Posted in ETFS, Market Timing
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2 comments on “SPY Lower Lows and Lower Highs just like the 1975 Time Frame
  1. austin says:

    I agree, I am waiting anxiously for your February forecast to materialize. I am ready to be greedy when others are fearful!

  2. austin says:

    I agree, I am anxiously waiting for your February forecast to materialize. I will be greedy when others are fearful!

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