Monday, December 26, 2011

The relationship between these two

The Top of 2007

The SPX daily index chart of the 2007 Top illustrates numerical annotations that serve as a reference to each written explanation. Each numerical annotation corresponds with its numbered explanation.
1) Prices in an uptrend will correct to a rising 200 day MA and can often overshoot these levels before finding support.  The inital sell off takes place well above the rising 200 day MA which better fits for a corrective pattern, not a reversal. Notice how the sharp sell-off quickly turned a rising 50 day MA to one that now has a declining slope. This dramatic sell-off resulted in a bearish cross of the two moving averages. In this case, the 50 Day MA acted as a lagging indicator because it continued to slope downward even when prices found support and chopped sideways. Tops in the market take time to form and generally carve out a defined pattern. It is these defined patterns that are accompanied with a flattening slope of the 50 day moving average. The only case in which tops in the market form quickly are when followed by an uptrend gone parabolic.

2) To further validate my previous point, notice again how prices quickly sell off, but ultimately regain support at or slightly below the rising 200 day moving average. Prices become at oversold levels and chop sideways which is favorable of a corrective pattern.

3)Price is a leading indicator that takes into account the  development of patterns and overall structure in the marketplace. This is key when evaluating the market's condition and will stand to be far superior than any indicator or technical analysis tool. Recognize that a double top pattern is developing. The last swing high was only able to slightly breach the previous minor high before a notable sell-off takes place. This type of topping pattern causes for a sideways sloping formation of the 50 day MA. It is at this time that the 200 Day MA will catch up to the 50 Day MA where a cross is more likely to occur.
The Top of 2011
Notice how the blue line shapes a rounding arc formation. This is typical of a top in the Market.

S&P Daily Chart (2007-2009) 
Again, a sideways 50 Day moving average.

The Top of 2011
This chart reiterates the similarity in price action of the 2007 Top.
1) An instant sell-off that caused for serious technical damage before prices could resume the uptrend. A dramatic or extreme sell-off that concludes within a short period of time is usually justified as a negative reaction to headline risk.

2)Both price and the 50 day MA are in agreement when the sell-off decisively penetrates the 200day MA. Notice the 50 Day MA sloping down previous to the sell-off. This would not imply a correction, but more likely a reversal.