Wednesday, February 15, 2012

Similar Patterns In The S&P 100 And The Euro

The S&P 100 and its wider cousin, the S&P 500 are where the preponderance of equity market derivatives are written. This is especially true of index derivatives. We have shown this chart of the S&P 100 before. While the S&P 500 made a massive top near the year 2000 top back in 2008, the S&P 100 didn't even come close.

We have talked about patterns on here countless times.  For me, the most telling pattern we have posted is the 21 year pattern of the Dow leading up to the 1929 collapse and the 21 year patter of the current commodities index leading up until the 2008 collapse.  These two patterns are identical.  It’s no irony that 1929 and 2008 rhymed quite nicely as it pertains to fundamentals surrounding those two indices.  Although policy and monetary decisions after 1929 and 2008 didn’t rhyme and therefore, we should not expect the financial market patterns to be similar.  Additionally, our economy is in a different type of bubble. 

Patterns in nature repeat themselves endlessly be it the patterns of seasons, of heart rhythms, of ecosystems, of planets, of life and death, etc.   You identify much of the world around you through your sensory identification of patterns.   Without patterns, each morning you would awaken to a completely different unknown rather than the pattern of your daily routine of corporate monotony. :)

Financial markets exhibit repeated patterns as well.  And, the longer the pattern has been in existence, the greater the chances are it is not just a minor perturbation but will fulfill outcomes of similar  patterns.  

Below are current patterns of the euro and the S&P 100.  These patterns are still in the process of working their way to completion.   Do you see any similarities?  You should.

  • Both started with a period of weakness or consolidation.
  • Both then rose substantially and really without moderation into their first peak.  In the euro, that peak was 2005.  In the S&P 100, it is less noticeable but just as substantial.  That was the 1998 crash involving Long Term Capital Management.
  • Both then resumed their climb to their ultimate peaks.
  • Both the euro and the S&P 100’s two waves upward to their highest peaks exhibited the same ratios    
  • Both are possibly exhibiting three lower highs and three lower lows in their culmination.
  • Both exhibited what appears to be very clear ABC waves in their final pattern of three successively lower peaks.  
  • Both may exhibit time symmetry between the three peaks if the S&P follows a similar pattern resolution. And, if that happens, we would expect the S&P to top some time this year.  Maybe even within weeks or as late as the fall of this year.

If the current action is indeed a third peak in the S&P, that peak may make a marginal new high over last year’s peak before starting a decline.

So, what happens next in both instances?   We shall all watch in real time. 




posted by TimingLogic at 9:35 AM

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