Dear fellow trader,
The Tri-Model Framework produced a BUY signal on Monday.
The valuation model swung from +22% to -22% in a matter of weeks (an equal and opposite reaction).
Valuation chart (type A): https://www.61point8.com/Portals/0/article%20images/2020/20200324/20200324BSM1.png
The technical model would be better articulated in a video, and I'll attempt to do so this evening or tomorrow morning. But to give you a snippet, the S&P 500 ($SPX) completed a sharp a-b-c decline (35.4% correction) that reclaimed 44% of the 2009-2020 bull run in a matter of four weeks. The $SPY hourly chart below depicts the end of 'wave c', which set the stage for today's rally that recorded a 93% up volume session on the NYSE. Despite this strength, think of it in terms of the initial rally that developed on the heels of the early-August 2019 decline, hence aftershocks are to be expected. And though I do believe the nominal low is in place, the actual correction will likely not end until this low has been retested (aftershocks) at least once, very possibly tracing out a 'triangle' ending to the correction (the base from where the next bull market would emerge). It's important to note that corrections are always a function of price AND time, hence I do expect this one to end at an equal or higher low in the coming weeks and months.
As for the $SPX quarterly chart, it depicts my interpretation of the the S&P 500 going as far back as 1871. Though the S&P 500 didn't get introduced until 1957, S&P 30 data going back to 1926, as well as pre-1926 data from the economist Alfred Cowles, helped paint a comprehensive picture (January 1871 to present). It was important to reconstruct the entire history of the index; Without the complete picture, it would be impossible to forecast where this correction fits in the grand scheme of things, where it's likely to end, and what to expect afterwards. Interestingly, the quarterly chart of the Dow Jones Industrial Average ($INDU) is in agreement.
$SPY hourly chart depicting the A-B-C decline: https://www.61point8.com/Portals/0/article%20images/2020/20200323/20200323SPY3.png
$SPX quarterly chart (1870's to present): https://www.61point8.com/Portals/0/article%20images/2020/20200324/20200324SPX1.png
$INDU quarterly chart: https://www.61point8.com/Portals/0/article%20images/2020/20200324/20200324INDU2.png
In short, this mean-reversion should last several days to several weeks, and it should target the valuation model's 'fair value' somewhere in the 2700's. Interestingly, that's the current location of the 20-day moving average, albeit there's nothing magical about it. Also note the impending 'death cross' (the 50-dma crossing under the 200-dma); I expect it to occur in the coming days, though it's to be deemed a lagging bearish signal, unlike the early-December 2018 one. You're going to hear a lot about it starting soon, but I'm personally going to treat it like a lunch invitation from a stingy friend who knows you've already eaten. I've always noticed that the 'death cross' event has a magnet effect on price. It occurs on the back of an oversold condition that catalyzes some sort of rally that draws price towards it. While a rally back to the 200-dma might seem far-fetched a this time, it's actually very common for the counter reaction to reach the span of 'wave b' of an a-b-c decline. Moreover, the cross will occur in the 3020-3030 area; that's the top of the May-September 2019 triangle from where price finally broke out back in early October.
The BUY/SELL model triggered a BUY signal yesterday upon the blue line crossing under the orange line. We acted upon this signal, having gotten the nod from both valuation and technical models.
Buy/Sell Model chart (daily timeframe): https://www.61point8.com/Portals/0/article%20images/2020/20200324/20200324BSM1.png
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Peter Ghostine (@peterghostine)
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