S&P 500 - June 17, 2011

In recent posts, I have highlighted structural weakness of S&P 500 using my two on my proprietary indicators, Market Alignment Index (MAI) and Objective Ellitott Wave indicator (OEW). These indicators measure aggregate structure and trend of all constituents of an index or composite.


The early detection of structural weakness has now led to full blown price breakdown on the index and many of its constituents on the daily charts.

Most weekly charts are still OK, but dailies are just brutal.

We knew what was likely to come. In a premium post of May 14, I wrote this to readers of my premium content as only one possible way of thinking about and dealing with risk:

"A July put 134 of SPY could be purchased on Friday for 3.60 or so dollars (June 134 was 2.50 or so). That is 3-4% of the base price with SPY trading around 134. If I have a position that has 15% of profit and I am reluctant to sell or reduce, I can buy put and insure. I buy insurance for my house, for my car, for my health, why not at least consider insurance for money I invest or speculate? I am not advocating or suggesting any risk-mitigation technique to anyone. I do not make suggestions as we all have read and understood from Terms of Use. You need to be able to assess your own risk and mitigate it the way it fits you, your personality and aspiration. I am just saying what I do and how I think when I become cautious about the position I have and want to maintain"


How many would have like to have done something like that at the very least that early into this correction/decline?

MAI and OEW are not the only proprietary indicators that I deploy daily to monitor the health and strength of the market. I also do a stage analysis of 5 US indexes via my own proprietary algorithm that is based on Stage Analysis methodology of Stan Weinstein


Currently, the stages of US indexes look like this

Looking back across my daily recording of stages at Market Time Premium, I see that S&P daily stage turned into Strong Decline on June 3

It had first turned into distribution on May 17

Market players have been puking risk assets all over the place. How many would have liked to have taken at least some defensive measure on May 17, or 20, or 23. How many would have like to be in full defensive mode on June 3?

Many if not all who are stuck with long positions, I think. But how could they know things would get this far down?

Well, we knew things were looking weak internally and structurally. I even made some posts here and talked about structural weakness.

We also could see on a daily basis how market stages were changing from advance to distribution to decline

All of this we knew using three indicators (MAI, OEW, Market Stage Table)

Stages and price structure are not to be trifled with as far as I am concerned

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S&P 500 - June 12, 2011

In two previous posts, I highlighted structural weakness of S&P 500

http://markettime.blogspot.com/2011/06/s-500-june-4-2011.html


http://markettime.blogspot.com/2011/05/s-500-may-20-2011.html


That weakness led to a breakdown in shorter term technicals and some intense selling

I used two proprietary Market Time Premium indicators, Market Alignment Index (MAI) and Objective Elliot Wave indicator (OEW) assess the structural weakness of the market.

This is how these indicators look now






Dropping and getting oversold.

They measure aggregate trend and alignment of the index.

I also pointed out the fact that the March price low was not associated with a weekly momentum cycle low. This is how the weekly momentum cycle looks now







Still dropping

One thing I like about TA is that it, at its purest, deals with fact and has nothing to do with opinions and biases.

It allows one to assess the situation. Knowing of structural weakness well before break down in price allowed me to take risk mitigating measures and be largely protected from the recent market turmoil

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S&P 500 - June 4, 2011

In a post of May 20, I used weekly Momentum Cycle, OEW aggregate trend, and Market Alignment Index indicators to sum up the state of S&P in 4 words

“Structurally positive, but weak!”


In that same post, I said:

“It’s not a disastrous situation. All three indicators are still above zero denoting a positive tilt to aggregate trend (as measured by OEW) and aggregate structure (as measured by MAI). The weekly momentum cycle we just saw is also above zero (dropping but above zero). So the situation is not terribly negative, but it reeks of internal weakness, like a patient with a serious yet curable disease. The cure of the market’s disease at this time is money deployed on the bid side.”

It seems like our proprietary indicators were correct spotting structural weakness 2 weeks ago

Let’s look their current status

Weekly momentum cycle (red graph) is still pointing down






Notice that the price low of March has so far not fetched a momentum low. Price has now dipped to an important area of support (1295-1305). A break of this area may accelerate selling and make the March low susceptible to a retest or even a break.

This is a daily chart with OEW aggregate trend, and Market Alignment Index (MAI) indicators




If you compare the current status of chart above with its status of the post of May 20 you will notice that the indicators have deteriorated rather significantly.

These indicators measure aggregate trend and aggregate price structure of all constituents of the index. Deteriorating structure cannot hold price and that’s what we warned then and that’s what we see now.

The only somewhat positive is that, while mid-term OEW and daily MAI have dipped below their respective March lows, price itself is still above its March low. This is price positively diverging from structure at this point. Will that lead to a bottom good enough soon for at least a tradable rally?

All I can say is what I said back in the post of May 20:

Market structure reeks of internal weakness, like a patient with a serious yet curable disease. The cure of the market’s disease at this time is money deployed on the bid side — we need buyers.

In that post of May 20, I also said:

“Weak structure is a sign that buyers are lacking. We need buyers to hold support, strengthen the internals and then lift the index. We need them while mid-term trend is up and index is above support”

Buyers did not show and we now have a mid-term downtrend.

For me to take bulls seriously, they should take a very small first step and get a swing low. They should then take a very small next step and get a short-term uptrend. After that, we’ll see how good they are maintaining a short-term uptrend and squeezing the shorts.

The rest of this report is reserved for subscribers of Market Time Premium

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