Fun With Numbers --- from Scott Reamer
You say you want a resolution?
These last several quarters have provided much frustration to investors like me who focus on macro and microeconomic fundamentals. When liquidity is rampant and money is flowing into stocks, it often does so without much of a wink at a company’s fundamentals: cash flow, asset value, earnings. The statistic that most brings that last point into full relief is the fact that, if you split the S&P 500 into quintiles based on share price alone, the bottom-priced quintile has vastly (and I do mean vastly) outperformed the highest price quintile since the March 12th low. You know this in your day-to-day perusal of the papers by the fact that Sohu.com is up 400% from its March $7 level while Procter & Gamble(PG:NYSE) is up 21% from its $80 March low.
So if cash flow, earnings, assets, etc. don’t matter, you’ve got a choice: you can sit on your hands until they do or do some in-depth reading on technical analysis in all its sundry forms. These last few quarters, I chose the later.
Like learning to read and speak Mandarin Chinese, doing some “work” on technical analysis has long been a goal of mine. The former because something’s going to take the place of the US$ eventually as the world’s reserve currency, and the gold-backed Islamic Dinar just doesn’t cut it; the later because living through the bubble in 2000 and the current bubblette has reinforced that technical analysis can be a valuable tool to identify buying and selling exhaustion points, set resistance and support levels, etc. So I did some reading. Actually, I did a ton of reading, some a remarkable waste of time, some quite valuable.
Over the last few weeks I have noticed that a few “studies” I use that are pointing to the same basic conclusion. I have found that a combination of Demark indicators, Fibonacci price and time relationships, and Elliott Wave patterns helpful to augment my fundamental work, and, interestingly, they are all pointing to, for the first time this year, a potentially important inflection point: a top in time and price.
First, understand that this is guesswork, as the market can do anything it wants and invalidate each of these studies independently or collectively. Indeed, the conclusion is pretty much experimental, but it does provide a decent framework against which to watch how the price action unfolds over this week and next. (How’s that for a grain of salt or two?). Do I feel strongly about the conclusion? Yes. But I am willing to abandon it should the price action warrant, which is probably how technical analysis should be used anyway. On to the data.
Fibonacci and Elliott Wave Studies
If you know something about Fibonacci, you know that Phi (the number 0.618) is the most important thing to remember about Fibonacci relationships. To this end, there are multiple rare Fibonacci Phi relationships, some perfect, some imperfect, between the all-time high on the SPX at 1552 on 3/24/00 and many of important low and high points between then and now. In sum, all of these these relationships “zone-in” to a 1068.21 S&P 500 price target and the first week of November (wk 11/3/03) target for a meaningful top in time and price. Allocating for some wiggle room, a few days plus or minus and a few points higher or lower – for each time frame discussed below - should just about bracket the conclusion.
So how do we get to this pretty audacious conclusion? Here’s the data, from the largest time frame to the smallest. [As a rule these relationships are much better viewed on a graph than read, so I encourage you to plot them yourself.]
(1) The 3/24/00 high to 10/10/02 low to present. SPX 1068.21 represents a perfect 0.382 (or 1-.618) retrace of the entire point loss from the 3/24/00 high to the 10/10/02 panic low. In terms of time, 11/4/03 is 0.382 times the span of days between 3/24/00 and 10/10/02 plus a Fibonacci 34 days (a perfect Phi relationships between these two time periods would have happened on 9/30/03). In other words, the 10/10/02 to 11/4/03 span is approximately .40 times the span of days from the all-time high to the 10/10/02 lows. Not a perfect Phi relationship, but pretty close given the length of time involved. (As an aside, the DOW is much closer to a perfect Phi relationship in time this week than the SPX). Additionally, between the 11/4/03 and 11/10/03 target dates, multiple Fibonacci time spans exist: 390 days between 10/10/02 and 11/4/03 is a Fibonacci 377 days plus a Fibonacci 34 days. 55 weeks is 10/10/02 to 10/31/03 and 13 months is 10/10/02 to 11/10/03.
(2) The 10/10/02 low to 12/2/02 high to 3/12/03 low to present. SPX 1069.03 makes the 12/2/02 top a perfect Phi 0.618 pivot point for the entire move from the 10/10/02 low to 1069. In other words the 10/10/02 low to 12/2/02 high in terms of points is equal to 0.618 of the move from the 10/10/02 low to 1069. In terms of time, 11/14/03 makes the 3/12/03 low a Phi pivot point between the 10/10/02 low and 11/14/03. In other words, from the 3/12/03 low to 11/14/03 is a perfect Phi 0.618 of the entire time span from 10/10/02 to 11/14/03.
(3) The 3/12/03 low to present. SPX 1068.21 makes the 8/6/03 low a perfect Phi pivot point for the entire move from 3/12/03 low to 1068. In other words the 3/12/03 low to the 8/6/03 low is 0.618 of the move 3/12/03 low to 1068. In terms of time, 11/4/03 makes the 8/06/03 low a perfect Phi pivot point between the 3/12/03 low and 11/4/03. In other words, from the 3/21/03 low to 8/6/03 is a perfect Phi 0.618 of the entire time span from 3/12/03 to 11/4/03.
(4) The 8/6/03 low to present. For this time and price span, there are few definitive price Fibonacci relationships that point to 1068 precisely. This is because, in Elliott Wave terms, the “form” this last wave is taking is a diagonal triangle, which does not often have classic Fibonacci Phi relationships. That said, Elliott Wave rules suggest that, if this is indeed a classic diagonal triangle formation, it cannot go beyond 1083.5 in terms of price or beyond the end of this week (11/7/03) in terms of time or else some other wave form is unfolding that suggests higher prices. In terms of time, 11/3/03 makes the 9/30/03 low a perfect Phi pivot point between the 8/6/03 low and 11/3/03. In other words, from the 8/06/03 low to the 9/30/03 low is 55 days, or a perfect 0.618 of the entire time span from 8/6/03 to 11/3/03.
Demark Studies
If you aren’t familiar with Tom Demark’s work (he licenses his stuff to Bloomberg), it attempts, broadly, to identify buying and selling exhaustion points – trend changes - for stocks using a “set-up” (1 to 9 consecutive price bars) followed by a “countdown” ( 1 to 13 price bars) system. It’s pretty complicated stuff but, at its heart, is sensible and, most importantly, has proven useful at important time and price points in the past. Demark work too has its own set of resistance and support calculations, many based on Fibonacci relationships, but optimized to Tom’s system. This system can be applied to any time frame, from monthly price bar charts all the way down to intraday charts with 1 minute price bars.
I looked at 17 different major market indices using Demark studies with Tom’s default settings: SPX, INDU, NDX, Nasdaq Comp, Value Line, Russell 2000, Russell 1000, Wilshire 5000, S&P Supercomposite, S&P 400, S&P 600, BKX, NYSE Comp, OEX, DJ Comp, DJ Transports, and the DJ Utilities.
Of the 17 major indices I measured, here are the relevant conclusions:
(1) 16 are within 0-3% of 1 to 3 different important resistance points. 8 are close to perfect (.618 or .382) Fibonacci retracement points from their all-time highs, including SPX; INDU; RIY; TMW; SPR; NYA; DJComp; and DJUtil, while 16 are near Demark-specific resistance points including the SPX, INDU, Nazz COMP, KVY, RTY, RIY, TMW, SPR, S&P Mid, S&P Small, BKX, NYA, OEX, DJ Comp, DJ Util.
(2) 15 have recently registered (last two weeks) or are about to register (next two weeks) Demark sell set-up “13”s on their WEEKLY charts (the SPX, INDU, NDX, CCMP, RTY, RIY, TMW, SPR, S&P Mid, S&P Small, BKX, NYA, OEX, DJ Comp, DJ Util)
(3) 16 have ticked to sell set-up “8”s at 11/3/03 on their MONTHLY charts (i.e. the minimum point for a valid sell-signal is an “8” or “9” signal). The one that didn’t, the BKX, ticked at a monthly sell set-up “13” on 11/3, which represents an almost perfect buying exhaustion point.
Conclusions
First, understand that, as with most technical analysis studies, there is always a need for some wiggle room: a few days here or there, a handful of points plus or minus, so understand that none of these prices or dates are offered with any type of specificity. What makes the conclusion unique is this: the 1068 area and the time frame of this week and next “resolve” 4 different and independent Elliott Wave patterns to almost perfect Fibonacci Phi relationships. And when combined with the Demark studies that suggest that many important US indices are at or very near the point of buying exhaustion in price and time, the SPX 1068 target and the next few days then neatly (perhaps too neatly?) bring to full conclusion an amazing run for stocks and relate that run to a still-unfolding bear market.
With respect to the final diagonal triangle Elliott Wave from the 8/6/03 low to present, it helps to know that, usually, this type of wave “evolves” with smaller and smaller bottom-to-top waves up (in this case from 8/6/03 to 9/29/03, from 9/30/03 to 10/15/03, and from 10/24/03 to present) in terms of price and time. So far, this one foots the bill. Of note, too, is that, diagonal triangles sometimes end in an exhaustion move above trendline on great volume and breadth. That trendline is the one connecting the 9/19/03 high and the 10/15/03 high: this week it runs from 1062 to 1067 Monday to Friday.
Given all of the above, the ideal scenario that would resolve and relate the entire time and price move from 3/24/00 to now, with all the various important tradable tops and bottoms in between, would be the following (and believe me when I say that I know I am tempting the trading Gods even laying out such a scenario):
A near term low that is found this morning around the 1044 area (perhaps off of a disappointing factory orders or ISM service release?), then a move back up on Thursday (off good jobless claims numbers?) to the 1050-1060 area and then a spike up toward our 1068 target area on Friday with above average volume and great breadth figures. Perhaps Friday’s price action is triggered off of a good employment report due out before the open. Who can say? But since we’re already tempting fate, time relationships suggest a more granular time target: a top around 11AM ET on Friday 11/7/03.
What happens from that top is up to various interpretations but the ones based on Elliott patterns, Demark studies, and Fibonacci relationships are decidedly bearish. Let’s just say that they suggest such a top wouldn’t be seen again for years. Years.
So is this the way the great run from 10/10/02 resolves itself? The record number of weeks of bullishness among the various sentiment measures? The CoT data showing retail long and commercials short SPX futures? The record ratio of insider sellers to buyers? Valuation? Small vs large cap outperformance? Etc. Etc. Who knows? The above time and price target, while satisfying some usually important relationships, could well turn out to be irrelevant in the extreme. Best part about it is that we’ll know very, very soon.
Scott Reamer
Position in NDX
Scott welcomes your comments and feedback at scott@minyanville.com.
Scott Reamer runs Union Tree Capital, a Denver-based hedge fund. Previously, he was a sell-side analyst for nine years covering the technology, media, and Internet sectors for Prudential Securities, Bear Stearns, Donaldson Lufkin & Jenrette and SG Cowen.
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