Choose Your Own Adventure: SPX 2013
- Posted by DynamicHedge
- on March 4th, 2012
From a previous post on fractals:
Fractals create self-similar, repeating, non-symmetrical patterns and shapes. Markets appear self-similar over multiple timeframes the same way that a fern looks self-similar at different magnification…
…The balancing of supply and demand is up to the many participants, each possessing different levels of skill and sophistication, each acting on unevenly distributed information while working towards uncommon goals. This process is what leaves the footprint of the market which appears to be moving intelligently on all time frames.
The violent selloff and subsequent grinding higher feels very unique. Some have even said this market feels “unnatural” or “rigged” due to quantitative easing, high frequency trading, LTRO, ZIRP and other boogie men. I assure you these market conditions are not unique at all. Here are 5 examples of statistically similar markets and what transpired afterwards.
These instances were identified by our pattern recognition algorithm as self-similar in form to the market conditions we are currently experiencing. The requirements for this search was a substantial selloff followed with a choppy bottoming process and a grind higher taking out the previous highs. Spoiler alert: These instances (since 1970) overwhelmingly occur in bull markets and tend to lead to meaningfully higher prices.
For reference sake, here’s where we’re at:
The result is quite bearish:
Actually embedded in instance 1 (freaky): July 1990 – March 1991
The result: Higher prices
January 1994 – March 1995
The result: Super bull
February 2005 – July 2005
The result: A pullback and new highs
April 2010 – November 2010
The result: This instance is fresh in our minds and most will remember a shallow pullback and higher prices.
To aid your visualization I’ve included the appropriate negative space for both a bullish and bearish outcome. There is room for both interpretations, but the choice, as always, is up to you.
Disclaimer: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please click here for a full disclaimer.
DynamicHedge is an equities, futures and derivatives trader based on the West Coast. He runs a long/short opportunistic relative-value strategy within a proprietary trading group. More
- Big Down Days: A Lesson from Recent History
- Market Cap Arbitrage: SPY vs IWM
- How to Deal with High Frequency Nowcast Economic Data
- An Almost Impossible VXX Rally
- 4 Misconceptions about Dow Theory
- Gap Personality: When to Chase and When to Hold Off
- Sophisticated versus Effective
- Three Month Consolidation Break
- Efficient Markets Believe In Trends
- Marketview: Lost Steam