Wednesday, February 03, 2010


Over the years I have found that the best way to identify the reversal of a trend is to look for a break in the trend's rhythm of reactions. Reactions within an extended move up or down show a strong tendency to be of the same length when measured along the price dimension. Sometimes they also show a tendency to last about the same number of days. It is this tendency which is the basis of my box theory of market action ( which I think shares many features with Darvas' original idea).

From this point of view the bull market which began from the March 2009 low point in the S&P is still going strong. This is clearly evident in the first chart above this post. This line chart shows the daily cumulative total of the difference between advancing and declining issues traded on the New York Stock Exchange. Notice that over the past 11 months there have been three reactions within the up trend, each of about the same size, and each ending when the 50 day moving average was touched.

The top chart shows the daily trading ranges in the cash S&P 500, together with its 50 and 200 day moving averages. The recent drop from the 1150 high matched the average length of the two preceding big reactions. It also stopped just a shade above midpoint support (dotted purple line). The downside penetration of the 50 day moving average matched the size of a similar penetration last July.

All of these observations tell me that the rhythm of this 11 months up trend is still intact. The implication is that new highs for the bull market lie ahead. As you know I think the S&P will reach the 1200 level during the next three months.

What would it take to cast some doubt on the bull market trend?

On the top chart I have drawn a green dash line at the 1030 level, the last reaction low prior to the top. Should the S&P drop below that level and below the 200 day moving average (red line) I would have reason to worry about the continuation of the bull market trend. But I probably wouldn't give up on it unless and until the 200 day moving average itself were to turn lower.


jeff said...

Wonderful analysis Carl.

janet said...

Great tutorial Carl, increasing my position in the qqqq.

Kishore said...

Great post! Simple but "All We Need Analysis".

To dance with a 400 lb. Gorilla, we need to catch her ryththm or she stomps us with her feet and clobbers us with her hands.

Carl, what you have shown above is the rythm on daily charts since March 2009.

What does the rythm look like on weekly charts since year 2000?

Bears seem to have a longer-term perspective for their gloom and doom forecasts.

However, day-trading bears (includes me), who went against the rythm of Carl's daily charts above, paid a heavy price last year.

All good..all good said...

Hi Carl,
You spent a lot of time with this analysis. Thank you!

F&H Painting said...

I wonder if Carl will hold overnight?

pimaCanyon said...

F&H Painting:

Just an FYI. Carl has said that the trades that he posts here are only a portion of what he trades overall. So you can bet he's holding overnight and has been since his signals confirmed a bull many months ago.

Aarpenn said...


Thanks so much for doing the analysis and taking the time to explain to us.


Wags94596 said...

Nice job highlighting the NYSE cummulative A/D line. It is a classic indicator that all too often is ignored by most of the bloggers on the net!

F&H Painting said...

I was referring to the portion of his account that is used primarily for day trading and that he posts about on this board.

PM said...

Hi Carl,

We had no buy signal during the normal trading hours, but my model has now issued an immediate buy signal on the opening in the evening hours. This buy signal would be confirmed with a close tomorrow above 1088.10. In this case, the only thing that could nullify this buy signal would be a major sell off during the overnight hours.


Kindest regards,


Win said...

I think this correction will probably take ES to around 1030 after earnings season is over, but you may be correct that the 200 MA (or thereabouts) will be support. The 50 MA is still resistance up above. Good luck, and thank you again.