Get Ready for Action

Click on Chart to Enlarge

Today's post is a bit of a recap of the last few weeks of action in SPY and what I would expect next.

The chart above has a few notes of what I said to expect in previous posts. The boxes on the chart are there to show the importance of time relations between phases of correction/consolidation. From the small green and red boxes on the chart, you would maybe think that I drew those after the fact, but they were my best approximation of what has been typical after bear market rallies peak and then break key support. Now if I was way off on those projections, then I would have had to reconsider my outlook and future expectations, but since they have been right on, I will continue to follow the same logic and reasoning noted in previous posts.

The large blue box and the first part of the large pink box are of equal time. Notice how the highest price (since the Nov low) was reached at equal time to the blue box. The pink box is divided into a basic golden section (1 + 0.618 = 1.618) and the right edge of the pink box (which is today) is the date at which the time of the pink box is 1.618 * the time of the blue box. I am expecting prices to start to decline sharply very soon. Those time factors are important relations in consolidations like these, especially since the 1.00 relation precisely marked the peak price of this advance.

Also, on a more anecdotal note, just about every market prediction that I have heard from pseudo-experts, and even some good technicians, have been that they expect the trading range to continue for "quite some time" or for the "foreseeable future", etc. This is classic group think in behavioral finance. For whatever reason (lack of data and knowledge of history, etc) research and surveys show that people tend to assume that what has happened recently will continue to happen well into the future. People don't anticipate change very well, especially with their money.

For the non-quantitative investor, pay attention in coming months to people at work and church, etc, and what they think about the stock market. When the general public starts panicking and talking about how bad the market is, and if they should take money out of their 401K's and put it in bonds, etc, then you can strongly anticipate the market is bottoming.

Again, my suggestion is to take protective measures NOW, before it is patently obvious what is happening. I have already suggested a trade entry on BGZ on this blog recently which could be used as a hedge for long term stock portfolios, or as a speculative trade; managing this trade is my top priority for the blog in coming weeks. Again, the best historical comparisons to the current price action of the S&P 500 suggest that the next decline is likely to be severe, but should be over by early April or before.

Pete