As the year and quarter are coming to a close it might be worthwhile to put the quarter into a historical context. As regular readers know I’ve been pointing toward the 1999/2000 roadmap as one of the analogs of interest as markets have followed a very similar structure.
Identifying repetitive market structures can be useful in gauging risk/reward and it certainly helped define some solid opportunities in 2014. The key is to recognize the difference between risk/reward opportunity versus a guaranteed prediction. There is no such thing, but markets do follow patterns, hence concepts such as seasonality can be helpful, but are also no guarantee.
An example of structure watch can be what we outlined yesterday in terms of the December behavior in the $SPY: Weakness in the early part of the month followed by mid to end month strength:
December 2014 has been similar in structure so far compared to 2013 and 1999 $SPX pic.twitter.com/UDxU2uXJ65
— Northy (@NorthmanTrader) December 29, 2014
So what does the $SPX quarterly picture tell us?
1. The $SPX is on its 8th consecutive quarterly gain.
2. Each of the past 7 quarters has seen moves exceeding the upper quarterly Bollinger band.
3. Not once in 12 quarters has the $SPX closed below its quarterly 5 EMA.
4. The current run is only outmatched by the run in the 90’s that led to the year 2000 correction.
5. The two major corrections that occurred after the 2000 and 2007 peaks followed quarters with large candlewicks that had pierced the quarterly 5EMA to the downside (see red arrows).
6. This current quarter shows a similar candle (see red arrows).
7. In the year 2007 still higher prices came in the quarter following before the real correction began
8. In the year 2007 the highs were in with that quarterly candle.
9. Both corrections resulted in a move toward the lower quarterly Bollinger band.
10. In both cases the following price range was largely confined within the previous quarter’s price range while the year 2007 case put in another high but also not making a new low versus the previous quarter. New lows versus the previous quarter did not come until the 2nd quarter following the peak.
Now none of this guarantees such a repeat coming, but it shows that from a charting perspective similar conditions are in place for a repeat to occur. It is a limited sample size no doubt, but it is certainly notable that both previous tops were accompanied by similar patterns.
We will know a lot more by the end of the next quarter of course, but it is a pattern worth noting as it may have larger volatility implications which aligns largely with the 2015 outlook I’ve outlined here: Volatility Ahead.