Getting Technical: The Humpy Pattern Thesis Lives On

The S&P 500 closed at its highest level in 13 months on Wednesday. During the day, we got as high as 1105.37, but we haven’t been able to hold 1,100 going into a close yet. The S&P 500 was down slightly Tuesday, but the Dow was up. In fact, the Dow has been up every day this month.

I still cling to my Humpy Pattern Thesis. This chart below of the S&P 500 clearly shows a rising pattern of surges—humps if you will. I have no idea what it means for the future but I’m passing it on to you.

Comments

[untrusting ...:]

Well, that's about 50 points/month for last five months, so guess we should expect 50x12months = 600 more points over the next 12 months. That would be be about S&P 1600. Sound about right, a new record high in the worst recession since 1930. Makes perfect sense.

Nov 11 06:24 PM

[drewriders:]

I am expecting the market to trade similar to 2004 next year. Sideways mostly. Doubt we will hit S&P 1300 next year.

Nov 11 06:53 PM

[JPDX:]

Something to remember, at least half of the rally since March was a correction from the crazy lows we had. Flip your charts upside down and draw the technicals that way to see.

Nov 11 07:46 PM

[TraderRob:]

The "crazy lows" for the S&P were still in double digit p/e ratios. The pattern is a bull market. The market and corp. earnings are working together to perpetuate a self fulfilling prophecy. The "pattern" is unsustainable, as Untrusting suggested above, and must reach a tipping point. The key is determining the catalyst.

Just as the market as decided it's own upward destiny, there will come a day where the buying trend becomes obviously inappropriate when considering actual economic health. I for one felt this way months ago, yet the market is broad. S&P 1100 may be it, but the MACD and Slow Stochastics are suggesting we pop through the highs.

The craziness continues...

Nov 11 10:48 PM

[StockMaster...:]

I think the pattern could hold until we get some kind of a blow-off top. I think that is more likely than a blow-off downdraft because everyone runs the risk of losing their money in the bank with the devaluation of the dollar. The fed is trying to create inflation so we all put our money to work and make jobs! This is difficult to do though since the last 10 years our jobs are overseas so count on low interest rates until 2011.

Nov 11 10:59 PM

[bob adamson:]

The question must be asked why there wasn’t a mild stock market correction last September as many predicted, why the recent pause was so mild and why investors appear determined to buy on the dips (giving the Humpy Pattern to which Eddy Elfenblein creatively refers) even after over eight months of spectacular increases.

Try to visualize any eight month period in living memory except that since March of this year and ask what the general mood would be if the S&P 500 had increased from 666 at the beginning of that period to 1100 at the end. The general mood would be extremely buoyant and the market consequently overbought. What is going on now, therefore?

Arguably the answer is that the back-story we all focus on now is not only the recent eight month dramatic recovery of stock market prices but also the traumatic drops preceding March of this year (particularly the plunge of October 2008). Relief that the worst appears to be behind us is mixed with an unfocussed anxiety arising from the unprecedented scare of the October of 2008 to March of 2009 period coupled with discomfort in the unorthodox fiscal and monetary measures that the authorities considered necessary to prevent a deflationary depression disaster. Investors are feeling their way forward (and upward) steadily but with great caution.

The foregoing is a somewhat different analysis from the one I have given in comments in response to a couple of articles earlier this week but the difference is largely one of nuance.

We should be keeping a close eye on day to day developments because the current public mood of unfocussed anxiety (increasingly tinged with hope perhaps?) can fuel stock market swings in either direction should some future unexpected event (it needn’t be major in its own right) becomes the focus of that anxiety or hope. Paradoxically, the fact that some are now starting to predict that significant further stock market gains are just around the corner sounds a note of caution for me

Nov 12 02:48 AM

[Mad Hedge F...:]

zxs If I’ve told you once, I’ve told you a thousand times, stay out of those crummy neighborhoods, where the street corners are crowded with high priced stocks of dubious moral character wearing stiletto heels, fishnet stockings, miniskirts, and shoulder handbags. Sure, I know you young traders have needs, think with your hormones, and believe you can live forever. But if you absolutely have to go slumming, at least use some cheap protection. I noticed today that the January 1030 S&P 500 puts were selling at a bargain $19 today. That means for a mere $950 you can buy some decent downside protection for a $55,000 portfolio that takes you all the way out to January 15, 2010. That is bang on the support level that held in the last sell off. If you double top here on the charts and go down for a retest, you double you money. If yearend profit taking causes us to sell off going into the holidays, and we break that support, you make more. If the market melts down the day after we flip the calendar page to 2010, a distinct possibility, then you hit a home run. If the lemmings keep driving this market up every day for two more months, then you lose $900, or 1.72% of your portfolio, pennies, really, against the huge returns you have booked so far this year. It’s a win, win, win, lose pennies trader. I know that the pros that have done for a long time put these trades on without even thinking about it. It’s all about risk control. Since I am a cheapskate, I only like strapping on trades that have a risk/reward ratio overwhelmingly in my favor, and with the volatility index today a bargain 23%, this fits the bill nicely. Buy your storm insurance when the sun is shining.

Nov 12 11:36 AM

[TinyTim:]

Ummmm. Climbing a wall of worry.

People feel compelled to climb because they need the returns.

Nov 12 04:17 PM