squark62's  Instablog

(see my intro to trading long/short ETFs in pairs using geodesic concepts for general background)

Current S&P 500 model indication:
mid-range outlook: overbought - since 2009-09-09
near-term outlook: oversold - since 2009-10-30
index volatility increasing significantly - since 2009-10-23

oct-30-2009 21:15 EST
in 9 trading days (from oct-20 to oct-30) the S&P 500 index wiped out all it's gains from sep-9, when i called the index overbought, to oct-19.  because the rate of decline thus far has been so fast, the "delta neutral" geodesic coordinates are way behind in catching up with it's position on sep-9.

think of a paddle ball toy with a rubber ball attached to the paddle by an elastic string.  after hitting the ball with the paddle, it's is possible to pull the paddle back for a period of time before the string stretches enough to change the velocity of the ball in the same direction of motion as the paddle.  or think of driving a boat on a calm flat surface of water and then suddenly you put the motor in reverse w/o turning the wheel, it will take some time before the boat stops and starts moving in the opposite direction.  there are other analogies, but hopefully this will suffice for now.

ok, so since S&P 500 today is where it was on sep-09, would the index be considered corrected?  depends on what you mean by corrected.  using the geodesic analysis as i have described, i would say no.  the ball (delta neutral) is still out of position by a good deal from where it was on sep-9.   see below.

turns out the ball is headed back in the same direction as the "paddle" as annotated by the red arrow above.  but presuming the S&P 500 fully corrects from here, there's considerable more time and downward motion of the index before delta neutral compensates for lagging the index.  at the moment i'm pondering estimates as how much further would the index change to move the geodesic coordinates back to sep-9 levels.  will post more of the usual charts soon and some i haven't published before.

the chart below is what i call my "seismographic" or volatility indicator.  the further the "delta neutral" geodesic coordinates gets away from the apex, the greater the uncertainty of knowing which direction the index will be going from day to day.  bottom line, things are getting pretty dicey!  increasing s-waves on the way!  that's geological speak for this type of shaking is the most dangerous and causes the most damage.  conservative traders may want to consider selling on the pops.