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Why I am not as universally bullish as I was....$SPX Frogger

By Jason Brumbalow :: Chief Operating Officer
Jan 10, 2007, 08:22

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This is a really busy chart, and I could write a book about it, but I don’t have time just this second. This is the weekly cash $SPX. Note how all the Fib confluences are building around what is now bearish divergence and a major price resistance point on a weekly chart. The monthly chart would clarify this a bit more, but I wanted to do weekly just to show what the $SPX is struggling against which the $INDU has not had to lately because it is in relatively virgin territory.

This looks like the old Frogger video game. The farther the frog goes, the more streets it has to cross and the greater a chance it has of getting run down crossing the street. Note bearish divergences that occurred in major retracement levels since the end of the bear market in 2002. Note what I called the MADPL. That is the period in which my equity curve (built on long trades only) expanded the most with virtually no volatility. That is what I called the “Monkey and Dartboard Period – Long”. In those days I could literally buy any bullish retracement pattern and it would immediately slingshot into profitability. That period had the same feel as the period from late 1997 to 2000.

That all changed as 2004 progressed, and got really messy this past year. I had to adjust my stops to deal with this increased volatility to keep my stops from constantly being hit (which is why I reverted to ATR-style stops).

As you can see, we are once again running into some stiff price resistance and indeed we are also showing bearish divergence in terms of RSI and momentum at highly oversold levels. You can begin to see the SOS indications that some headwinds are starting to show up from a longer-term perspective.

We have been shaken out of these little corrections several times in this rally. I think this is the second longest bear market rally with one of the five slowest positive returns since the records have been kept. This chart analysis is not totally complete either, but there is enough there to show what the $SPX is up against, and why I am not as bullish as I was several months ago when we pulled out of the last correction.

Take care,

DBB

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