BarroMetrics Views: S&P – Up or Down?
Technically, the S&P appears to be at an inflection point.
Figure 1 shows a chart of the S&P superimposed with a 5-day swing and an 18-day swing.
The chart illustrates “The Rule of Four”. It’s called a rule, but it’s actually more of a guideline. This behavioural parameter suggests that the fourth attempt at a support or resistance level will usually be successful – a market will normally break out; BUT if it fails to do this, we will see a breach of the beginning of the directional move that started the four attempts.
In this case, the beginning of the move is at the 18-day low, 1560.
Figure 1 also shows that as the market approached the 1776 high, the daily range started to shrink. The reduction range continued until Thursday when we saw an explosive move down coincident with a better-than-expected GDP. On Friday, the move down was reversed, coincident with the release of Non-Farm Payrolls that were far better than expected.
Friday’s response to the Non-Farm Payroll raises the possibility of a change in character. So far, the S&P has been responding to ‘favourable’ numbers by heading south; and has been responding to ‘unfavourable’ numbers by heading north. Because of this response, I’ve taken the view that the S&P has been motivated by a markets fixation with the continuation or ending of QE – rather than reflecting the ‘real economy’.
Friday’s price action suggests the QE idea is incorrect, or can we say we are seeing, a return to normality? It’s too soon to tell, given Thursday’s price action. But, there is another possible interpretation.
I think it more likely we are seeing what Wyckoff called ‘absorption’ i.e. a battle is taking place between buyers and sellers, and this battle has still to be resolved. The problem with this interpretation is my view that QE has reduced the supply of sellers. If this is the case, then the ‘absorption’ idea has less chance of being correct.
So, both of my possible interpretations have ‘holes’.
It will be interesting to see what develops over the next few days. Today being Veterans’ Day the United States, it is unlikely we will see that resolution today. Let’s see what the rest of the week brings.
FIGURE 1 S&P 18-day & 5-day Swings