S&P 2014-10-13

BarroMetrics Views:  S&P 2014-10-13

I am postponing the conclusion to Default Future until tomorrow because a very interesting event occurred last week….

Figure 1 shows a weekly chart of the S&P with the levels marked from the 1815 lows to the 1987 highs. We see that the S&P has closed below the top of value. Normally I would expect the next stage to be a move to the bottom of value at 1872 en route to the Primary Buy Zone at 1831 to 1815.

Moreover, a Upthrust Change in Trend pattern was triggered for a swing of an 18-day. magnitude.  This normally would suggest a move to at least the Primary Buy Zone (1831 to 1815), and probably a change in trend from up to down…..normally. 

But, these are not normal times. QE has so distorted the S&P price mechanism that even reliable patterns like an Upthrust have failed more often than previously.

The question now is are we seeing a tipping point of the belief that the FED will, and can, forever rescue the US Stock Market Bull?

Figure 2, for me, provides the tools to answer the question.

The current retracement may be said to form a test of the retest at 1909. In the process it has taken out the prior July 2014 low. The 13-week swing line will turn around 1904.

Now, if the 13-week swing line does turn down, and this is followed by a bullish conviction bar close above 1920, we have a continuation buy signal that suggests the Bull is intact.

On the other hand, a bearish conviction close  below 1878 will confirm the scenario of Figure 1; it would also imply that a bear market has started.

Finally, I’d note in passing, that if we see a monthly close below 1913, we’ll have seen a sell signal in the system I presented earlier this year. It would be the first time since the Bull started that this system has triggered a sell.

The system comprises of:

  1. a setup: the current CAPE reading is at least 150% above its long-term average; and 
  2. a trigger: a monthly S&P close that is 3% orf more below the previously monthly close. 

The signal is invalidated with a monthly close above 2020.

01-sp-18d.png

FIGURE 1 18-day S&P Cash

02-sp-18d.png

FIGURE 2 18-day S&P Cash 

03-cape.png

FIGURE 3 CAPE