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Markets – Macro – Stocks – Charts – Alerts

Shades of Grey: 2007 Edition

fifty-shades-of-greyTraders and funds have been getting spanked hard and the Fed’s response was swift: Bullard came out and talked about QE delay. How lame. Free markets have scared the Fed for a long time and so it’s no surprise that a 200 handle drop on the $ES gets them talking.

Having outlined the case for an 11% correction the day after all time highs were made I’ve been closely watching the structures that are being formed in the markets and in the member feed we’ve held a steady eye on some key indicators that have us getting bullish for the short term, especially as we approached the 10% correction mark. Key indices such as the $RUT and the #DAX are already way past that point and the $RUT has actually been very strong this week.

But it is the larger structure that has us especially curious as this weeks lows appear to repeat a pattern we have seen before: 2007.

Now the week isn’t over, but have a look at the weekly chart:

weekly $SPX

The obvious similarity is that deep pierce below the lower weekly Bollinger band, but the similarity doesn’t end there. It is the fact that this swift correction came straight off of new highs and moved below the weekly 50MA and following a long run of market excess. Clearly this has been the case here as well. Markets don’t go down in a straight line for too long and wide disconnects from key moving averages tend to generate a drive for balance. So for now, if we have hit a bottom here, we can expect some reconnect efforts.

Yet, as the 2007 case shows, this initial violent correction off of all time highs can also produce new highs:

2007

In 2007 it took a mere 8 weeks from the initial shock. This shock, incidentally came with a large spike in the $VXO following a long dormant period. The monthly chart of it also shows a striking similarity in structure between the two periods:

$VXO monthly

What could we expect on a repeat? A move back toward the middle Bollinger band, new highs and then a vicious bear market into 2015. Given the market’s apparent adherence to this megaphone structure the following scenarios could be in the offing:

spy

This is all very speculative of course, but the timing and associated seasonality would match up nicely. Incidentally all this would also line up nicely with the weekly $VIX chart I’ve been showing from time to time:

VIX weekly

But it’s just a scenario and we still have to trade what’s in front of us. And this market has shown to be very different than any previous QE correction as evidenced by the deep drop in high/lows which now mirrors that of the 2008/2009 financial crisis period:

USHL

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