And the band played on … ?

the band on the titanic
the band on the titanic

CLIFF NOTES: couple days ago, posted the “chart of my lifetime” and it showed a very long term pattern completing on the Dow Jones Transports:

the most important chart in my lifetime

We did have a break down after levels were hit and, on an intraday basis, a 5 wave count down can be seen.  The BIG QUESTION: is that the top of a big correction or resumption of a bear trend?  Who knows .. it was a pattern and they either 1) work or 2) don’t …so, to put it in context I have attached a long term MONTHLY chart of the S&P cash and show the POTENTIAL PATTERN (bearish) at play and then go all the way down to a 5 minute chart to show how the lower time frames might be giving us a warning of what is coming OR not ….

either way, it’s all about the swing low and STRATEGY of either 1) taking profit or 2) moving stops up or 3) trying to get short … believe the charts below can serve as a road map.

one last thing … keep in mind the past couple months of charts.  not ONE has shown a BUY pattern and 5 wave counts are everywhere (FB, AMZN, LNKD, BIDU, etc), parabolic charts are everywhere (PCLN, TSLA, IBB, GOOG, etc) and indices are completing all kinds of patterns (SELL) on decreasing volume.  Not to mention there is absolutely NO FEAR in the market and EVERYONE surveyed is bullish.  Margin debt is a big deal and the geo political environment is always a big deal … folks, it’s time to be very prudent in allocation, stop placement (if long) and for goodness sakes don’t listen to the talking head TV pundits …

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WMT / SPX ratio revisted

CLIFF NOTES: support found in the relative strength of WMT/SPX. When this ratio goes UP the stock market goes down, when the ratio goes DOWN the stock market goes UP.

In the world of ratio analysis we are looking at the relative strength of something versus something.  This has nothing to do w/ the RSI.  If the numerator is BIGGER (more strength) than the denominator then the ratio goes UP and vice versa.  This does not mean that the individual securities being compared will not go up or down.  Just they should go up or down based on the strength or weakness.

The concept behind the WMT/SPX ratio is one of volatility and risk.  The only thing I can say is to look at the chart below:

WMT/SPX ratio w/ the S&P (blue line) overlaid
WMT/SPX ratio w/ the S&P (blue line) overlaid

when this ratio hits a bottom the market tops and vice versa.  now, we have been watching patterns get hit and work for a time but then fail (BUY patterns of the ratio) and, most recently, we hit another pattern and the ratio has shown strength and, well, the S&P has shown some weakness. Also, note the new highs in the S&P were NEVER confirmed by new lows in the ratio.  per a couple posts ago – it’s all about the swing low – so watch weekly swing lows.  Until they are taken out, this band can definitely play on.  Guess it doesn’t matter that the band is on the Market Titantic.

Just bringing up a simple technique to look for POTENTIAL correlations that most would not consider …

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relative strength of staples vs the S&P importance

in order to get up to speed, if you have not been following, please see the following post:

http://bartscharts.com/2013/10/07/staples-strength-vs-the-sp/

we completed a perfect price/time pattern BUY on the ratio and it did, in fact, respect the pattern level.  HOWEVER, since then we have taken out the lows of that pattern and if we go back you’ll see that the .786 was ‘still a target.’  the importance of this ratio cannot be overstated – at every major inflection point since 2000 (I don’t have data that goes back any farther) it has pointed to all of the tops and bottoms of the market.  perhaps we’ll go down and tag the .786 … what I can say, is if we blow thru the .786 then it will show a lack of institutional fear in this market as the thesis is the staples start to out perform as rotation occurs in a volatile or bearish market.  so far, this ratio has been stagnant and correcting for a very long time … let’s stay tuned and see what a little lower does for our ratio.

additionally, I have included the WMT gauge.  please see these posts to get a feel for the importance of this ratio:

http://bartscharts.com/2013/10/25/stay-tuned-the-buy-on-wmtsp-is-complete-or-perhaps-a-little-lower/

XLP/SPX - looks like lower target to get tagged ...
XLP/SPX – looks like lower target to get tagged …
WMT/SPX - little lower ...
WMT/SPX – little lower …

“What is and What Should Never Be” Part VI Conclusion

here’s the conclusion from 2 months ago:

http://bartscharts.com/2013/09/16/part-vi-the-sp-500-conclusion/

a quick review of the Part 1-5 has shown that most if not all of our playbook has been playing itself out.  NOTHING has changed my view that we are due for a very large correction, or dare I say, a very surprising THUMP of gargantuan  proportions.  the stage is set …

the manipulation of this market is of epic proportions … it should be correcting or be going down but the FED has made sure it never will be …they can keep printing but one day it will end…

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Staples Strength vs the S&P

if you wan to catch up I recommend reading the following two posts:

http://bartscharts.com/2013/09/22/the-upcoming-week-of-922-for-the-sp/

http://bartscharts.com/2013/09/25/the-ratio-of-staples-to-the-sp-xlp-spx-trust-me-its-important/

this AM, our pattern that we have been following has completed.  what does that mean?  the pattern either works or it doesn’t … if it works then our thesis is that the staples (as a sector of the overall market)  will start to outperform on a relative strength basis (no not the oscillator) the general market.  when this has occurred in the past, it has very nicely timed inflections points to the down side in the market ….

October 07 2013 XLP - SPX ratio Occtober 07 2013 XLP - SPX comparison

Long term monthly w/ bullish stair steps present
Long term monthly w/ bullish stair steps present

stay tuned … the symmetry of the BUY pattern in PRICE and TIME is very powerful that this level should hold.

the WMT greeter and inflection points

ratio analysis compares the relative strength of one security versus another.  if the numerator is stronger then the ratio will go up and vice versa.  what I try to look for are meaningful ratio’s that plot fear and greed and can warn us of potential inflection points in the market.

I am going to make an assumption that “everyone” loves Walmart ($WMT) and it’s place as a fabled American institution is a fact.  Our thesis today is during BULL markets it will “not be as strong” as the overall market (the ratio of WMT/SPX will go DOWN) and during times of fear or volatility it will “be stronger” than the overall market (the ratio of WMT/SPX will go UP).

the chart below does a pretty good job of showing this assumption is valid.

the blue line is the SPX. the candles are the ratio of WMT/SPX. the dashed purple vertical lines are placed on the chart to show the inflection points at tops and bottoms.

note, in 2000 (high), 2003 (low), 2007 (high), 2009 (low) the ratio has 1) moved w/ almost the same velocity and 2) inflected almost exactly inverse as the S&P.  HOWEVER from 04/2011-08/2012 the ratio actually trended with the overall market.  (this is denoted by the blue arrow going up during this time frame)  then, the ratio “went back to normal” and started going back down and the market continued up.  an interesting divergence,,,,

ratio of WMT/SPX compared to the SPX
ratio of WMT/SPX compared to the SPX

 

the power of pattern recognition is it works on everything.  so, we can look for patterns w/in this ratio to show potential inflections and then wrap it into an overall look at different sectors w/in the SPX to make a reasonable guess at moves to come.  also, the longer the time frame of the chart, the more powerful the potential pattern becomes.

the chart below shows a clear 5 wave move ending and a pattern to be completing just a little lower.  this signals that IF (the big IF) the pattern holds and the ratio finds support and begins to move UP then we “should” see a corresponding move down in the overall market.

buy pattern coming into play a little lower
buy pattern coming into play a little lower

stay tuned and say hi to the next greeter you see and also tell them  thanks for the market information!

Bart