Sliding Down Hill

By: Erik Swarts | Mon, Jun 27, 2011
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As the equity markets slide back towards the precipice that comes into view ~ SPX 1257 - it would be wise to keep in mind that assets such as silver and oil have already broken down and started their respective legs lower. Traders should also be aware that it is the end of the month and end of the quarter this week, where, let's just say - the market has been known to defy the path of least resistance for a moment or three. There is of course the standing concerns in Europe - with a pivotal vote scheduled in Greece on Wednesday and the now vocal admission by various euro members that the real elephant in the room is not in fact Greece - but Spain. All in all your average week...

I find it fascinating that the August 2007 fractal study is correlating on an hourly basis so closely to how the current market is trending. If you remember that time period, it was one of the worst performing months for the large quant firms such as Renaissance Capital. It is not a stretch to believe that the same algorithmic trading systems that make up such a large portion of the daily volume are once again reflexively trading off of each other as the different asset correlations and stat-arb opportunities break down; thus producing the same volatile swings in the market and leaving their artifacts in the charts. The breakdowns in the high yield credit markets, the financials, the currency and commodity markets gives credibility towards that reasoning.

SPX Hourly Fractal Study

Neo-technically (yes that is my own) speaking, a detail that caught my attention when reviewing the SPX daily chart is the nature of the Stochastic Oscillator. The Stochastic Oscillator is momentum metric that follows the velocity of price - not price itself. A main reason I utilize it, is because as a general rule, momentum changes before price. With that said - there are a few patterns and dynamics within the oscillator that can color expectations going forward. One of those is when the oscillator gets embedded along either the top or bottom of the overbought and oversold ranges. Traditionally, they are set at 80 for the top or overbought threshold and 20 as the lower or oversold threshold.

When an embedded Stochastic develops - it means the prevailing trend is strengthening. It typically occurs most often during strong uptrends. The SPX has exhibited degrees of an embedded Stochastic trend over the majority of sessions since the March 2009 low. For the first time since the bear market bottom - the Stochastic on the daily chart has been embedded around the oversold rail. Granted the range has been expanding towards the mid-point - but as you would notice if you looked at the reverse dynamic from the September low - an expanding range does not necessarily interrupt the strength of the primary trend. Confused?

SPX Daily

SPX Daily

To make a long story short - the embedded nature of the Oscillator appears to confirm what the fractal study is indicating - a lower low is very likely over the short term. If the Oscillator remains embedded over the next week or so - the bulls hope for a more transitory low will be displaced by an eroding longer-term technical picture.

 


Disclaimer: (Position in UUP)

I just joined Twitter. All my active trades and occasional market musings are disclosed in real-time here.

 


 

Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

Copyright © 2011-2014 Erik Swarts

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