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Friday, April 13, 2012

Analog Update: April 13, 2012

Happy Friday the 13th!

We reached our target range (1380-1400) for the H&S pattern to set up [see: Analog Details], hitting 1388.13 yesterday.  The shoulders are still a bit lopsided, but that's not especially problematic.

I would prefer to tack on another 10 points or so before the trip down, but this morning's dip feels pretty convincing.  We'll want to keep an eye on the little channel that guided the past two days.  And, of course, a break of the neckline at 1361 would complete the H&S pattern, signaling a nominal target of 1305.

I've added the alternative path to 1462 that we discussed yesterday (purple, dashed).  A strong bounce at or above the neckline would bust the H&S pattern and signal a rapid rise to the 1462-1472 level

Along with the worse than expected University of Michigan Consumer Confidence report, worse than expected Chinese GDP growth and worse than expected results from JPM and WFC [see: What Do Bankers Dream Of?], the situation in Spain is getting ugly.

Today, we learn that Spanish banks increased their borrowings from the ECB by 50% over the past month alone -- from 152 billion euros to 227 billion euros (the same 75 billion euro increase as Italy reported last week.)

As we pointed out yesterday, the Spanish 5 yr CDS hit a near-record 491 bps.  This morning, the 10-year surprised no one by topping 6%.

We all remember the drama over the Greek default, when CDS amounted to $3 billion net.  Spanish net notional is reported to be nearly $15 billion, on $173 billion of gross.  For every buyer of insurance, there is a seller.  And, although the chains of title may be hundreds or even of thousands of transactions long, somewhere there are bankers sweating bullets over how this is going to end.  Hint: not pretty.

More later.


  1. Thanks PW! I studied your "2010 rising wedge" and  "2011-2012 rising wedge" yesterday.  I was very surprised because they almost look identical (so far as of April).   This is like a science fiction if they come out to be the same ultimately.

    In particular, I looked at "2010 rising wedge"to see what is going to happen in our near term in 2012.  As you explained in today's post, you revealed that a decline to 1305 is a possibility in the near term.   And that is corresponding to March time frame in "2010 rising wedge" chart. 

    However, I want to make a note that March of 2011, there was a big earthquake in Japan which caused the decline of SPX to around 1248.    A natural disaster is unlikely to repeat in the same schedule.   It is hard to imagine something similar to that earthquake to cause a similar decline to 1305 in 2012.

    Again, if it comes true, it is more amazing that fiction.


  2. Tommy, news are merely excuses for charts to fulfil its purposes. If it is not earthquake, there is always a long list of black swan events that can take the market down. Spain, another US downgrade, North Korean war, etc...PW, please correct me if I am wrong

  3. Look at DAX and CAC today, down almost 2.5 %, spx is down a measly 0.7%, It is either the US market is fearless of the Spain situation or they are just slow to respond, or they think BB got their back....

  4. Thanks for the question, Tommy.

    While the earthquake obviously helped the market along, SPX started down in February 2011 because: (1) it was very deep into a rising wedge; (2) it had completed a huge Crab pattern that started with the April 2010 sell-off; and, (3) it tagged the Midline (the big red line in the first chart) dating back to 1935 that had been support since 1991, but had turned into resistance when SPX fell back through in Sep 08.

    As far as analogs go, it's been a while since I posted this, but take a close look at the third chart.  Note in particular that the 2011 drop started within a few days of the 2007 drop, and that the bottom of the plunge came on day 69 (from the top) versus day 70 in 2008.  The ultimate low was day 108, versus day 107 in 2008. 

    The odds against these two patterns randomly repeating would be astronomical.  If it hadn't been for a deliberate, rumor-induced ramp job overnight leading into Oct 27, I believe the market would have continued following the pattern and begun a much bigger crash on day 150.

    Analogs don't always work out.  As CM points out below, any number of unforeseen events can derail things.  The one we're following now, for instance, would probably fail if BB were to announce a fresh $1T QE tomorrow morning; the bounce I'm expecting at 1305 might be thrown off if S&P further downgraded the US. 

    But, when they work out, analogs are a thing of beauty.  My personal portfolio was up 28X in July/August last year.  Not 28 percent, but 28 TIMES.  I loaded up on OTM puts when everyone was bullish and hung on for the ride (I even sold out too soon.)  Such is the power of analogs, and the power of harmonics. 

    I spend several hours every day looking for and following them because 28X was fun, and I suspect one of the several analogs I'm currently following will play out similarly.  Oops, afraid I've gone over my 5-min ramble limit...

  5. I appreciate how 'neat' the analogs seem. And if you were using individual securities rather than an index I might bite - but the components of the index change, even something like AAPL is skewing the Nasdaq this year in a way it didn't last year. It's like volume. All the talk of how volume is anemic (and I agree it is low) but then you have to consider Citi's 1-10 reverse split.

    The market certainly does seem to have a rhythm which over-rules the news most times. On a day like yesterday I'll bet the cnbc and bloomberg had to put their heads together to come up with reasons the market was up considering all the bad news.

  6. I agree re yesterday's news.  I kept hearing folks were expecting "better than expected" GDP out of China (straight from the Department of Redundancy Department in the NW corner of the circular building.)  These patterns work just as well on individual securities, but there's too much noise there for my taste.  IMO, cycles are driven by human psychology.  In the markets, it's the neverending battle between fear and greed -- with occasional unforeseen events that provide CNBC a "reason" to convey to the all the sheeple.