{"id":30507,"date":"2015-11-04T01:25:26","date_gmt":"2015-11-04T09:25:26","guid":{"rendered":"http:\/\/drduru.com\/onetwentytwo\/?p=30507"},"modified":"2015-11-04T01:25:26","modified_gmt":"2015-11-04T09:25:26","slug":"how-the-sp-500s-current-breakdown-increases-the-odds-of-further-selling","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2015\/11\/04\/how-the-sp-500s-current-breakdown-increases-the-odds-of-further-selling\/","title":{"rendered":"How the S&#038;P 500&#8217;s Current Breakdown Increases the Odds of Further Selling"},"content":{"rendered":"<p><strong>(This is an excerpt from an article I originally published on Seeking Alpha on September 8, 2015. <a href=\"http:\/\/seekingalpha.com\/article\/3494246-how-the-s-and-p-500s-current-breakdown-increases-the-odds-of-further-selling\" target=\"_blank\">Click here to read the entire piece<\/a>.)<\/strong><\/p>\n<p>This piece was inspired by a model of the stock market created by Daniel Moore in Seeking Alpha titled &#8220;<a href=\"http:\/\/seekingalpha.com\/article\/3484256-dow-sends-rare-signal-at-the-august-2015-month-end-close?ifp=0&#038;app=1\" target=\"_blank\">Dow Sends Rare Signal At The August 2015 Month-End Close<\/a>.&#8221; Moore&#8217;s model uses historical data from 1957 to August, 2015 to show that a negative trailing 12-month change in the Dow Jones Industrial Average (DIA) tends to presage a &#8220;severe correction&#8221; when it closely follows an all-time high on the S&#038;P 500 (SPY). <\/p>\n<p>This foreboding signal takes on extra poignancy given a combination of dramatic trading events in August along with the handwringing accompanying the much anticipated decision on monetary policy from the U.S. Federal Reserve on September 17, 2015. {snip}<\/p>\n<p><center><br \/>\n<figure id=\"attachment_30413\" aria-describedby=\"caption-attachment-30413\" style=\"width: 540px\" class=\"wp-caption alignnone\"><a href=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/08\/150831_SP500-monthly.png\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/08\/150831_SP500-monthly.png\" alt=\"This monthly view puts August&#039;s sell-off into proper perspective. The month now looks like the &quot;natural&quot; conclusion to a year of waning momentum.\" width=\"550\" height=\"375\" class=\"size-full wp-image-30413\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/08\/150831_SP500-monthly.png 550w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/08\/150831_SP500-monthly-300x205.png 300w\" sizes=\"auto, (max-width: 550px) 100vw, 550px\" \/><\/a><figcaption id=\"caption-attachment-30413\" class=\"wp-caption-text\">This monthly view puts August&#8217;s sell-off into proper perspective. The month now looks like the &#8220;natural&#8221; conclusion to a year of waning momentum.<\/figcaption><\/figure><br \/>\n<strong>Source: <a href=\"http:\/\/www.freestockcharts.com\/platform\/v1\" target=\"_blank\">FreeStockCharts.com<\/a><\/strong><br \/>\n<\/center><\/p>\n<p>Moore&#8217;s model suggests that no matter what the Federal Reserve does this month, the outcome (or apparent outcome) will turn out poorly. {snip}<\/p>\n<p><center><br \/>\n<figure id=\"attachment_30514\" aria-describedby=\"caption-attachment-30514\" style=\"width: 540px\" class=\"wp-caption alignnone\"><a href=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150904_SP500.png\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150904_SP500.png\" alt=\"A close-up of the S&amp;P 500&#039;s severe breakdown\" width=\"550\" height=\"375\" class=\"size-full wp-image-30514\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150904_SP500.png 550w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150904_SP500-300x205.png 300w\" sizes=\"auto, (max-width: 550px) 100vw, 550px\" \/><\/a><figcaption id=\"caption-attachment-30514\" class=\"wp-caption-text\">A close-up of the S&#038;P 500&#8217;s severe breakdown<\/figcaption><\/figure><br \/>\n<strong>Source: <a href=\"http:\/\/www.freestockcharts.com\/platform\/v1\" target=\"_blank\">FreeStockCharts.com<\/a><\/strong><br \/>\n<\/center><\/p>\n<p>The S&#038;P 500 suffered an epic breakdown in relative terms. {snip}<\/p>\n<p>Moore&#8217;s model provides an interpretation of a significant loss of momentum for the S&#038;P 500. {snip}<\/p>\n<p>{snip}<\/p>\n<p>With all of this swirl, it is hard to fathom a near-term positive catalyst that could put a final floor on the sell-off. Like the jobs report, anything the Fed does can receive a negative spin. This context means ANY bearish model at this point will appear appealing and convincing. However, Moore&#8217;s model is more than a well-timed bearish piece. It provides an interesting perspective for interpreting the significance and importance of moving averages as trading and investing signals.<\/p>\n<p>Moore&#8217;s use of trailing 12-month changes in price is analogous to using a daily moving average. {snip}<\/p>\n<p>My simplified 200-day moving average (DMA) model focuses on the S&#038;P 500 as being sufficiently representative of the larger action in the stock market. {snip}<\/p>\n<p>Before diving into my results and analysis, I propose some corrections to Moore&#8217;s data. {snip}<\/p>\n<p>My model, what I will call the 200DMA post-peak correction signal, captures additional milestones. {snip}<\/p>\n<p><em><strong>Click to enlarge image&#8230;<\/strong><\/em><br \/>\n<center><br \/>\n<figure id=\"attachment_30520\" aria-describedby=\"caption-attachment-30520\" style=\"width: 290px\" class=\"wp-caption alignnone\"><a href=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150907_200DMA_AllTimeHighCorrectionSignal.png\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150907_200DMA_AllTimeHighCorrectionSignal-300x172.png\" alt=\"The 200-day moving average signal for corrections after an all-time high\" width=\"300\" height=\"172\" class=\"size-medium wp-image-30520\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150907_200DMA_AllTimeHighCorrectionSignal-300x172.png 300w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150907_200DMA_AllTimeHighCorrectionSignal.png 923w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/a><figcaption id=\"caption-attachment-30520\" class=\"wp-caption-text\">The 200-day moving average signal for corrections after an all-time high<\/figcaption><\/figure><br \/>\n<strong>Source for price data: <a href=\"http:\/\/finance.yahoo.com\/q\/hp?s=^GSPC+Historical+Prices\" target=\"_blank\">Yahoo!Finance<\/a>. Analysis provided for review <a href=\"https:\/\/drive.google.com\/file\/d\/0B7LPxp0nWPsSTW1WWEFaYVl5OTg\/view?usp=sharing\" target=\"_blank\">on Google drive<\/a><\/strong><br \/>\n<\/center><\/p>\n<p>The &#8220;good news&#8221; from the table is that of the 17 historical occurrences of a loss of momentum following a new all-time high on the S&#038;P 500, 12 (or 71%) came with a &#8220;significant&#8221; warning from the 200DMA signal (warning ratio at or below 0.80). {snip}<\/p>\n<p>{snip}<\/p>\n<p>The last 1990s were quite a volatile period when the stock market&#8217;s corrections happened quickly, violently, and the recoveries were nearly as swift. I am fascinated to see the S&#038;P 500 has now gone 16 years without experiencing similar tumult up and down. {snip}<\/p>\n<p>Today, the financial markets are surrounded by extremely active and interventionist central banks. {snip}<\/p>\n<p>In the meantime, the 200DMA signal for post all-time high corrections suggests that the market&#8217;s angst will continue to careen into that meeting. If the Fed&#8217;s own analysts are on the case, they are surely looking at the same data the rest of us are reviewing. Those analysts are assessing the likelihood the market&#8217;s correction will lengthen and steepen based on the ways i&#8217;s are dotted and t&#8217;s are crossed in the statement. Chair Janet Yellen will need the coaching of a lifetime for her press conference.<\/p>\n<p><center><br \/>\n<figure id=\"attachment_30535\" aria-describedby=\"caption-attachment-30535\" style=\"width: 540px\" class=\"wp-caption alignnone\"><a href=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150904_VIX.png\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150904_VIX.png\" alt=\"The volatility index, the VIX, has cooled off significantly from the flash crash, but has not yet decisively dropped from the &quot;danger zone.&quot; I define this zone as starting from the low of the last day where volatility experienced a significant surge.\" width=\"550\" height=\"375\" class=\"size-full wp-image-30535\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150904_VIX.png 550w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150904_VIX-300x205.png 300w\" sizes=\"auto, (max-width: 550px) 100vw, 550px\" \/><\/a><figcaption id=\"caption-attachment-30535\" class=\"wp-caption-text\">The volatility index, the VIX, has cooled off significantly from the flash crash, but has not yet decisively dropped from the &#8220;danger zone.&#8221; I define this zone as starting from the low of the last day where volatility experienced a significant surge.<\/figcaption><\/figure><br \/>\n<figure id=\"attachment_30536\" aria-describedby=\"caption-attachment-30536\" style=\"width: 540px\" class=\"wp-caption alignnone\"><a href=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150904_SSEC.png\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150904_SSEC.png\" alt=\"The Chinese government demonstrated a keen sense for the importance of the 200-day moving average as it desperately acted to prop up a bubble on the Shanghai Composite (SSEC). Surely, the Fed is also watching the 200DMA on the S&amp;P 500 and its momentum...?\" width=\"550\" height=\"375\" class=\"size-full wp-image-30536\" srcset=\"https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150904_SSEC.png 550w, https:\/\/drduru.com\/onetwentytwo\/wp-content\/uploads\/2015\/09\/150904_SSEC-300x205.png 300w\" sizes=\"auto, (max-width: 550px) 100vw, 550px\" \/><\/a><figcaption id=\"caption-attachment-30536\" class=\"wp-caption-text\">The Chinese government demonstrated a keen sense for the importance of the 200-day moving average as it desperately acted to prop up a bubble on the Shanghai Composite (SSEC). Surely, the Fed is also watching the 200DMA on the S&#038;P 500 and its momentum&#8230;?<\/figcaption><\/figure><br \/>\n<strong>Source: <a href=\"http:\/\/www.freestockcharts.com\/platform\/v1\" target=\"_blank\">FreeStockCharts.com<\/a><\/strong><br \/>\n<\/center><\/p>\n<p>(I have posted <a href=\"https:\/\/drive.google.com\/file\/d\/0B7LPxp0nWPsSTW1WWEFaYVl5OTg\/view?usp=sharing\" target=\"_blank\">the spreadsheet including my formulas<\/a> for readers to review, cross-reference, and audit. Feedback, additions, suggestions for future analysis, and corrections welcome!)<\/p>\n<p>Be careful out there!<\/p>\n<p>Full disclosure: long SSO shares and call options<\/p>\n<p><strong>(This is an excerpt from an article I originally published on Seeking Alpha on September 8, 2015. <a href=\"http:\/\/seekingalpha.com\/article\/3494246-how-the-s-and-p-500s-current-breakdown-increases-the-odds-of-further-selling\" target=\"_blank\">Click here to read the entire piece<\/a>.)<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>(This is an excerpt from an article I originally published on Seeking Alpha on September 8, 2015. Click here to read the entire piece.) This piece was inspired by a model of the stock market created by Daniel Moore in Seeking Alpha titled &#8220;Dow Sends Rare Signal At The August 2015 Month-End Close.&#8221; Moore&#8217;s model &#8230; <a title=\"How the S&#038;P 500&#8217;s Current Breakdown Increases the Odds of Further Selling\" class=\"read-more\" href=\"https:\/\/drduru.com\/onetwentytwo\/2015\/11\/04\/how-the-sp-500s-current-breakdown-increases-the-odds-of-further-selling\/\">Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[483,4,997,62],"tags":[1147,1148,1595,65,1557,362,1562,1597],"class_list":["post-30507","post","type-post","status-publish","format-standard","hentry","category-breakdown","category-china","category-sp-500-analysis","category-technical-analysis","tag-dia","tag-dow-jones","tag-federal-reserve","tag-sp-500","tag-shanghai-composite-index","tag-spy","tag-ssec","tag-technical-analysis"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>How the S&amp;P 500&#039;s Current Breakdown Increases the Odds of Further Selling - ONE-TWENTY TWO: Trading Financial Markets<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/drduru.com\/onetwentytwo\/2015\/11\/04\/how-the-sp-500s-current-breakdown-increases-the-odds-of-further-selling\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How the S&amp;P 500&#039;s Current Breakdown Increases the Odds of Further Selling - ONE-TWENTY TWO: Trading Financial Markets\" \/>\n<meta property=\"og:description\" content=\"(This is an excerpt from an article I originally published on Seeking Alpha on September 8, 2015. 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Click here to read the entire piece.) This piece was inspired by a model of the stock market created by Daniel Moore in Seeking Alpha titled &#8220;Dow Sends Rare Signal At The August 2015 Month-End Close.&#8221; Moore&#8217;s model ... 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