Was S&P breakdown just a teaser?

The strong equity rally of the last two days (without AAPL???) has broken the short term downtrend.  The relative weakness of other “risk” assets (like junk bonds, emerging markets, commodities) makes me think that a deeper leg down is on the way, but in the shorter term could we make new highs?  If we are following the recipe of the last two years, which appears to be reasonably likely given the Central Bank fuel that is in place again this year, a new high could indeed be in the cards.

In the chart below, I’ve highlighted an initial pullback in red (treating our current breakdown as such).  In each case, the breakdown occurred from a rising (bearish) wedge.  In 2010, it occurred in January-February.  In 2011, it occurred in early March.  This year, it was early April.  In each of the past two years, the high was made in late April-early May.  In each of the last two years, the market has gone on to finish a Head-and Shoulders pattern through the summer (which did not break down in 2010, but did break down in 2011).  Are we in for a repeat performance?

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  1. April 12, 2012 at 8:56 pm

    I find it interesting that the last two days volume was weak in those particular “risk” assets you mentioned – high yield, commodities, emerging market. GOOG was up in after-hours but looks to have faltered toward the end of after-hours trading. Tomorrow should be interesting.

    Great post.

  2. April 12, 2012 at 10:39 pm

    Thanks for the kind words, DarkLord.

    And let me add, any time is a good time for a Vader reference… so well done on that! I agree about the volume – especially in JNK and HYG. They have been below the volume of March’s sell-off these last two days. JNK was especially anemic today. EEM was decent and FXI actually have good volume, but all of those “risk-on” plays peaked in late February, and are now in more developed downtrends than the S&P. It’ll be interesting to see what happens as they return to their downward trendline resistance.

    As much as anything, I’m shocked to see AAPL down on two straight big green days! Shocking, given that it’s carried the indexes YTD. May be another canary in the coal mine.

  1. April 17, 2012 at 12:12 pm

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