Thursday, January 26, 2012

Hypothetical Market Sketch

1- Market already topped.
2- Market falls into the next turn date and bottoms in the next few days.

3- Market rises for a few days to gather more optimism before topping out within the final 4 days of the next turn window. This top will be followed by a sharper decline. (High Probability)


3- Market continues to rise past the recent high. This would mean that the market has begun a significant rally phase (Low Probability)

Please note that this is just a hypothetical scenario and it will be refined based on the real-time data.
In the next post, few refined IPM analysis concepts will be shared to evaluate the market reaction to future IPM turn dates. 

Tuesday, January 24, 2012

IPM Turn Window - January 24, 2012

As mentioned previously, market has continued to rise above 1285 level. However, the interesting thing is that we recently got a Vix based sell signal. Last time this signal was generated was in late April 2011 – days before the market topped at ~1370 (SP500). This observation takes on even more importance when viewed in context with the broader over-bought condition and the market optimism, prevalent across the board. This kind of sentiment backdrop does not result in sharp rallies; instead it is a harbinger of market declines.

This background brings us to the current IPM turn date. In the last post, it was mentioned that the next turn date was within 2 weeks. After re-running the model, following outcome was achieved.

According to this analysis there are two IPM turn dates in close proximity with each other. The first date is tomorrow (1/25/12). Interestingly, this date coincides with the Federal Reserves’ meeting. With the market approaching its 2011 highs (DJIA and Nasdaq 100), optimism being elevated and Vix sell signal, it will be very interesting to closely observe the market reaction to the upcoming turn date.

Furthermore, there is another turn window in the next few days. This means that we could be in for choppy market action. 

Wednesday, January 18, 2012

Market Readies Itself for a Rise

The market broke above the 1285 level (mentioned in last update) and has since risen higher. Today, the market closed above 1300 after 6 months. This is a huge achievement by the market in light of all the negative news coming out of Europe with multiple high-profile debt downgrades.

Negative news such as debt downgrades typically coincide with market bottoms because it brings out excessive pessimism, and pessimism leads to market bottoms. However, recently we are not seeing excessive pessimism. Instead, we are witnessing elevated optimism.

From a contrarian perspective, this kind of psychological behavior (optimism instead of pessimism) would mean that we are very close to a market top. But our research shows that optimism and pessimism can stay elevated for very long time. Therefore, one should understand the broader market trend and analyze it in the bigger context.

As for the broader context, US indices have completed the 8/4 test to the upside and are now in an uptrend. Recent sideways market action (Jan 3 to Jan 17) has laid the foundation for a sharp market rise. This would mean that the market is ready to rally.

Since the next Inflection Point Model turn date is scheduled for after 2 weeks, it is possible for the markets to keep rising for the next two weeks. In the next post, we will discuss the actual Inflection Point Model turn date and its implications in the light of market trend.

Stop: 1285 (SP500) closing

Thursday, January 5, 2012

Happy New Year & IPM Turn date

In the last post, the following IPM chart was shown:
The market has risen into the above mentioned turn window. The turn window's last date was: 1/3/2012. So far market has peaked on this date. Therefore, markets should soon decline sharply.

At the same time, sentiment has become excessively bullish. This kind of behavior happens near the tops. 

Market's rise above Tuesday's high will invalidate the decline potential. Hence, one can define the risk of this trade with a stop above Tuesday's high. In other words: Short on a decline below 1268, with stop above 1285 (SP500).

P.S. I have been busy with another project, and that is why there have not been more frequent updates.