Brace Yourselves

By: Erik Swarts | Mon, Nov 14, 2011
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"Tell me how this ends," U.S. General David Petraeus asked memorably of the 2003 invasion of Iraq.

Political leaders and economists in the euro zone are searching frantically for answers to the same question as a bond market rout of European sovereign debt accelerates, putting the future of the single currency in jeopardy.

Until a few weeks ago, the most likely outcome appeared to be that the 17-nation currency area would muddle through. The euro zone would bail out a few highly indebted small peripheral states, patch up its rickety fiscal governance and avoid either a break-up or a major shift toward federal integration.

That was then. Now it seems that without a radical game-changing initiative within weeks, the crisis may no longer be controllable. - Tighter euro zone gains ground as debt crisis exit, Reuters


Here is an update of the SPX Meridian Market Theory chart that I have been following throughout the year. In my last update - I was opportunistic in the mindset that the charts may have been pointing towards an approaching long-term low. And while we found a low a few weeks later, I now find myself reinterpreting (in light of what I have found in the charts and the data from Europe and Asia) what the most recent rejection may mean towards the market going forward.

You may say I am becoming more concerned as the market has double and tripled dipped the same positive news out of Europe.

Near term, in either case - bull or bear, I find the market precariously placed at the top of the range and likely to fall back swiftly over the balance of the month.

SPX Monthly Chart

1987 SPX Daily

1994 SPX VIX Daily

What is noteworthy in the comparison to the 1994 rejection analog is the degree to which the market retraced the "crash" decline (both exceeded > than 61.8%), before quickly retesting the lows for a third time. The market has also exhibited similarities in momentum signatures to the 1994' MACD & stochastic indicators.

2011 SPX VIX Daily

What makes the current bounce even more impressive (and concerning in light of the velocity and magnitude of a typical bear market rally) is the rejection decline was over twice the size of 1994, but the market has bounced proportionally just as high. The same could be said with the 1987 crash. The 1987 decline was roughly twice the size, but the current market has bounced even higher. The market has displayed herculean strength and speed when contrasted with the previous two rejections. Considering we now know the benign nature of the issues confronting the markets in 1987 and 1994, it strikes a glaring contrast, both with the size and speed of the rally - and what we know of the troubles confronting Europe today.

As always - stay frosty.

SPX - Crash Performance Comparison StudySPX - Crash Structure Overlay Study

SPX - Meridian Rejection Study



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.

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