S&P March 2012-03-27

BarroMetrics Views: S&P March 2012-03-27

First off an apology and explanation for the silence.

A personal issue arose in early March which means I am flying the Singapore-HK-Singapore route every 18 days or so with the 5-days in HK taking up most of my time. This in turns means that the days in Singapore are choca-bloc. Something has to give, and usually, it is this blog.  I’ll be doing my best to resume posting around 3-days a week until end July when the issue will hopefully be resolved.

Turning to the S&P:

Bernanke’s comments implying that QE3 was still on the cards seemed to spark a strong reaction with the S&P. We saw an above average day’s range and, as Figure 1 shows, the buying was marked by strong buying control. Moreover, the winners beat the losers by a margin of 49 to 4 (i.e. an A/D ratio of 12.24).  So, we’d have some reason to believe that the correction is over.

But there are a couple of clouds on the horizon:

  1. The declining stocks average volume was 69.9M whereas the advancing stocks had an average of 47M. This is bearish divergence.
  2. Figure 2 shows that the breakout volume was way below normal – also a bearish divergence.

So how do we trade this?  To answer that question, I’ll turn to a conversation I was having with a friend, and great trader, Tom Wong. I told him that the QE’s had caused periods of advancing stock prices on decreasing range and volume. Tom suggested I have a look at Hedley’s Acceleration Bands.

Figure 3 shows the cash S&P with the Acceleration bands and a 10 EMA (close).

In this case, Tom suggests that since we see a ‘creeping trend’, the strategy is to be ‘long or out’ until we see a close below the 20 SMA (brown line) from which the bands are launched. Two consecutive closes (Tom insists that at lease one of those is a conviction bar) suggests a strong momentum upside breakout. A retest would take the form of the S&P coming back into the bands but closing above the 10-day EMA.

So, for the moment, I’ll be standing aside. I want to see what Wednesday and Thursday brings.

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FIGURE 1 Market Delta

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FIGURE 2 Normalised Volume Daily

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FIGURE 3 S&P with Acceleration Bands

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