February 19th, 2009

Symmetrical Triangles: Then and Now

The beauty of writing a blog is that it’s sort of like a diary. If one wants, you can look back to nearly ever day to see where the market was, how you felt about it and what your best guess was about the near-term prospect. And this past year is one for the books, record or otherwise. The only good thing is knowing that I’ve been fairly consistent and unwavering in my outlook.

Take for example, my post of February 20, 2008 entitled “Symmetrical Triangles or Moving Averages” (it’s worth clicking on this link to see that S&P chart as it looked a year ago). Sounds familiar doesn’t it? A year ago, I critiqued another bloggers opinion that the symmetrical triangle he saw in the S&P 500 foreshadowed a bottom. By that point, the S&P 500 had declined 12.92% from the October peak. I wrote then:

“What drives all charts, particularly charts of market indexes, is momentum. Market momentum, or investors’ psychology, matures over extended periods and once set in a direction don’t, on their own without an external driving force, change that direction. After extensive research, I’ve found that moving average(s) are the most reliable measure of market momentum.

Even more important (and more reliable, I should add) than the symmetrical triangle ….. is the fact that the 180-day moving average is on the verge of crossing down below the 300-day moving average. The 90-day and 60-day moving averages have already done so. For the momentum to unflinchingly and convincingly turn and move the market higher, the index would have to move back up above the 90-day moving average. That has happened in only 7.6% of cases based on over 40 years of daily trading data that the relationships existing in today’s chart of the S&P 500. It’s more likely, occurring in nearly 60% of cases, that the 180-day moving average drops below the 300-day before the Index crosses back above the 60-day. And when that happens, significant further downward momentum pressure ensues.”

My analysis was spot on. The index did recover from 1360.03 to 1426.63 (or 4.9%, a teeny-tiny amount by today’s volatility standard) by May 19 but thereafter began its descent to the November 20 low of 752.44, the level we’re testing today.

And on February 2, 2009, there I was again writing about symmetrical triangles and still sitting on the fence. This time I wrote:

“All market indexes are converging into symmetrical triangle formations. Unfortunately, this chart pattern happens to be one that could break either up or down with few indicators to reliably tip the market’s hand as to which it will ultimately be….What makes the pattern so interesting this time – not interesting but important – is that it’s at the same level as the 2003-04 bottom of the Tech Bubble Crash. Draw a horizontal trendline from that historic low and you’ll see this emerging symmetrical triangle forming smack dab on that line (remember the earlier conversation of a neckline of a humongous double-top last November?).

It’s to be expected that the market take a breather and collect itself here. What’s uncertain is whether the pause will turn out to be a consolidation leading to further declines beyond the trendline or a reversal leading to a recovery and the beginning of a new bull market….the odds are fairly high that the market action will merely morph into a more elongated, more complex pattern (like a double-bottom) of which the symmetrical triangle turns into merely the left-hand portion.”

We got our first indications that the symmetrical triangle is morphing with Monday’s 4.6% decline (compared with the 3 month retracement of 4.9% in 2008 that we were all so thrilled with). I don’t believe it’s breaking down like it did in February, 2008. My gut says the market’s morphing into a different bottom formation.

I only have the market’s relatively weak action to support the “morphing” rather than “breaking down” interpretation. Much of what you hear today is about a “buyers strike” rather than a “forced liquidations”. Back in November, a typical comment went something like this (11/24/2008):

” Buyers’ strike behavior can last for awhile, until most of the sellers have finished selling. Once selling pressure is relieved, sharp rally typically ensues. While it is impossible to predict the timing of the liquidation cycle, we do know that a large amount of cash has already been raised.”

Everyone knows now’s the time to protect and preserve capital, not looking for ways to grow it. There’s a ton of cash sitting on the sidelines afraid to be invested, yet not finding a safe home anywhere yet. I believe in my gut (and from the basing action of many stocks like those mentioned here recently), that we’re close to the bottom in terms of both time and percentage moves. Unfortunately, I just can’t say when and how much lower we have to go first so I, also, will have to wait for additional market confirmation.

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