S&P – Topping?

BarroMetrics Views: S&P – Topping?

Back from Switzerland – in time to see the S&P breakout to new highs accompanied by below average volume and range – a condition that, until QE, I’d be calling for a change in trend, from up to down. In this QE era, you may hazard a guess – you may suggest I’d say:

 ‘I need to see some sign that ‘The Belief has been shaken; you know, the belief that FED can keep up their magic act and prevent a bear market’.

Well, this time you’d be wrong………Why? Because this time, the Nov 12, AMB Fred Graph, shows we have dropped US$200B from the high (Figure 1). In the past, this type of drop has signaled some sort of top. Moreover, the CAPE system signaled that the Oct drop warned of a topping process. So, in addition to the technical evidence, we have two ‘QE’ indicators suggesting a possible topping pattern.

But, what the QE indicators don’t do, is tell us the magnitude of the correction (assuming it is only a bull market correction). Here where the Barros Swings come into play.

FIGURE 2 shows that a sell signal would trigger a 13-week change in trend pattern (the daily proxy is the 73-period Hart Swing, the black line in Figure 2). A 13-week change in trend suggests a minimum move to the 12-month line turn. Currently this price is at 1715.36 (basis cash).

So, if a sell signal is triggered, the minimum price would be the 12-month line turn price, a price that is currently well below the market. And, the maximum?

Based on previous bear markets, a correction of the 60-month swing trend, would result in a move back to the 1987 yearly bar, 340.45 to 216.88. Those prices sound extreme even to my bearish ears. So, let’s just aim for the 1715 area until a bear market is proven.

What would trigger the sell? A bearish conviction close below 2011. By the same token, a bullish conviction close above 2059 would negate the bear setup. And, this time, unlike other occasions, if a sell is triggered, I’ll be willing to take a short – provided we see rising volume and range on a decline.

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FIGURE 1: FRED Graph

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FIGURE 2 73-day Hart Swing