UPDATE from original OCT 12 post - Comparing Post-QE Pullbacks 2010 vs. 2012:
Below we have added new comments in bold, providing an update in terms of Tuesday’s close.
If you are unfamiliar with technical analysis, the easiest thing to watch is the 20-day moving average for the S&P 500. Not too many good things can happen until the 20-day is recaptured. On October 11, the S&P 500 closed at 1,432, which was below its 20-day moving average (1,450). Bulls would also like to see the slope of the 20-day turn back up. On Tuesday, the S&P 500 closed above its 20-day.
Much like the present day, stocks pulled back after the initial euphoria passed from the Fed’s announcement of QE2 on November 3, 2010.
While many of the conditions below align with common sense, once the thresholds below were cleared on a daily chart, the 2010 post-QE correction ended. Therefore, in 2012 we would like to see the following on a daily S&P 500 chart:
- RSI > 50 Tuesday RSI closed at 57
- MACD Black > MACD Red No MACD cross yet
- Full STO > 50 Still below 50
- S&P 500 > 20-day MA Closed above
- CCI > 0 Closed at 17.34
- ADX Green > ADX Red Yes, Green > Red
- ADX Black starting to turn back up Not yet
- ROC > 0 Yes
- Force Index > 0 TBD
- Accum/Dist rising Yes
- ULT > 50 Not yet
- CMF > 0 TBD
- Wm%R > -50 Mixed
- PPO Histogram ticking up Yes
In terms of a probabilistic turn, the higher the percentage of items checked off in the list above the better. As of the close on Tuesday 66% of the boxes above have been checked; 33% have not, which means from a probabilistic perspective the bulls have made some progress this week. Consequently, we covered a small portion of our hedges today. The S&P 500 would make an important higher high with a close greater than 1,460.41. Until that happens, we will remain open to more downside, but respectful of the progress made by the bulls this week.