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Technical Analysis

Bears Should Keep Low Expectations For A Trend Reversal

Yesterday’s rally was fueled by promises of low rates and more quantitative easing. As long as, one way or the other, inflation is kept low, bears should have low expectations for a trend reversal. In the best case, the correction may take the form of sideways action.

SPY_20140409

On the above SPY chart, the Probability State Indicator™ at the bottom pane shows the probability of a new 30-day high before a new 30-day low is made. At this point there is a small bias towards a new 30-day high due to the rally of yesterday and the probability is 0.61.

Since the 2009 bottom, there have been only a few occasions when the probability rose to 0.60 after falling at 0 and then fell back again towards 0. Those occasioning were during the 2010 and 2011 choppy markets. Below is a chart that shows the 2010 choppy market period:

SPY_20140409_2010

Two failures of making a new 30-day high after making a 30-day low are shown on the above chart, one in May and one in June of 2010. This type of sideways action adversely impacts the performance of trend-followers but does not severely hurt longer-term investors. It can also provide a sense of correction despite the fact that a serious one is actually not taking place and bears have little room to profit from such price action. It is possible that now may be the beginning of similar price action in the market that may last for a few months. But bears should keep their expectation of a trend reversal low. As long as there are no major events to spook the market, the FED has everything under control.

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Disclosure: no relevant positions.
Charting program: Amibroker
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