Sunday, January 22, 2012

The Mother of All Trend Line Breaks (?)

With the Sunday overnight trade about to begin in the Asian futures market, how about we take a look at what could be the mother of all trend line breaks this week. Yes, I'm talking about the Standard & Poors 500 (SPX). We'll look at a couple of daily charts that should frame exactly what is at stake and take a guess as to how this intriguing question will soon be resolved.

I created a new indicator this weekend and it is shown in the lower indicator panel of the SPX daily price charts. The output of this indicator shows us the relationship between the daily price of the SPX and its 50 day moving average (dma). A reading of ZERO means that the SPX and its 50 dma are the same. Positive readings are the percentage the SPX is above the 50 dma while negative readings are the percentage the SPX is below its 50 dma.  Also, positive readings differ in color as the SPX rises above its 50 dma.

This first chart covers the past 3 years and begins just before the historic 666.79 March 2009 bottom. Additionally, I have identified the daily cycle lows (DCL) which are typically 35 - 40 trading days apart and the intermediate (weekly) cycle lows (ICL) which are generally 5-6 months in duration.

Click on any chart to ENLARGE

The things I note about this chart is that a daily cycle low (DCL) is now due. Also, it's fairly unusual for the SPX to exceed its 50 dma by 3% (magenta), quite unusual for a reading greater than 4% (dark blue) and 5% has been a very rare reading for the past 2.5 years - in fact, in the most recent 2.5 year time frame I can count only 3 such occurrences and each lasted a matter of a single day. 

By the way, we nearly reached the 5% mark this past Thursday with a SPX close 4.76% above its 50 dma.

So, here is the trend line that all eyes are on. It is derived by connecting the 1576.09 high achieved on October 11, 2007 with the highs achieved in April and July of last year, 2011. 

We are very close to reaching that trend line. Something in the neighborhood of 1330 would be a break out. Heck, that's only 15 buck higher than last Friday's close of 1315.38. That does not sound like much, does it?

So we slice right through 1330 and keep heading to 1400, maybe to all-time highs and rival 1576.09 by summer. Kewl!


I think all the profit taking that stopped the SPX in April and July of 2011 is about to repeat, leaving the daily cycle to top and go into its timely sky dive. Additionally, those two runaway rallies since 2009 went by the name of QE1 and QE2. My hunch is that we need a QE3 to inflate the stock market so it will blast up through the line of resistance overhead. I have not heard that QE3 will be announced, nor do I think it will be announced at this Tuesday's Ben speech. 

But 4sure - if Ben does announce something like QE3 I have no doubt we will see the mother of all trend line breaks.

Have a great week!


  1. Thanks John! VIX has now closed well below 20. When the VIX is below 20, the strategy is bullish. Tough market. But we can trade what is working.

  2. Excellent analysis of DX/ES/SPX this past week, please keep it up!

  3. Very interesting indicator! Excellent work as always - Thanks for your efforts. -Steve

  4. Steve - I thought the new indicator worked quite well.

    After publishing this post I received an email from my mentor TOS script writer guru,
    Eric Purdy of (great website and run by a great individual).

    Anyway, Eric wrote to gently inform me that the indicator I thought I kinda cleverly
    invented is none other than 'THE' COMMODITY CHANNEL INDEX (CCI) indicator. I checked it
    out and you know what? He's right. Huh.

    You know, if only I could get these great ideas 50 years *before* everyone else, instead of 50 years
    *after* everyone else, I'd think I was kinda smart.

    Gotta go now .... need to think of some other kewl stuff that has already been invented.

  5. Gold miner:Thanks a lot John for CDY advice ,still hold it with a 40% gain.Added NUGT,GDXJ,KGC,PAL,SWC,HL 2 min after Fed decision.Covered my shorts.What a Dragon ride!!!Any new trading ideas?I OWE U ONE.