Thursday, May 9, 2013

The market growing taller and walking the same proportionate distance

The way I drew this chart is as follows:

I have used as base anchor point the low of 03/06/2009 and I have used as ending anchor points, the 3 subsequent low points of the starting weeks of 2010, 2011, 2012 and 2013.

Then I have projected these 4 segments by a 23.6% factor (fib number).

The result is to me interesting: in each of the years 2010, 2011 and 2012, the market reached this -23% fib extension by end of April/beginning of May and then retraced at least to the area where it was at the very beginning of the year (2011 and 2012, in particular, had approximately the same low the first week of the year).

By the same proportions, in 2013 the -23.6% fib extension target was very marginally pierced yesterday.

A word or two of caution here are needed: firstly, previous instances pierced the -23.6% fib level by as much approximately 2 SPY points (which if you trade in large amounts or with leverage can be painful to bear); secondly, unfortunately the 2013 fib level we have just reached is right above the previous 2007 market all-time high. This to me tells that there is potentially more shorts squeeze fuel to propel the market higher at this juncture compared to previous ones; thirdly, once a pattern is a pattern and becomes evident, it usually morphs into something else.

I have tried to lucubrate why this pattern seemed to be repeating and one hypothesis I came up with is that the liquidity injected into the system by the FED since 2008/2009 (which cumulatively is growing bigger each year), has the power to extend the market by a proportionate amount each here. In other words, it is like a man growing taller each year and being able to walk with one step a longer distance each year, but the length of his steps, although longer each year, is a constant proportion to his height.

If you have other plausible explanations, please share them here with me.

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