S&P 500 – 1159.73

DJIA – 10,785

May 11, 2010

“Is this a buy signal- or is it more like a bank run morphing into a run on debt laden countries?”

-Andy Kessler, The Wall Street Journal, May 8, 2009

I thought the stage was set for a correction, missing a catalyst amid resigned investor reception to better business news and positive earnings in an extended market. Thought to be known and tucked away, the catalyst reared its ugly head when fears of a systemic meltdown were triggered by potential derivative counterparty risk tied to sovereign debt. The U.S. banks reportedly hold only $16.5 billion or so of Greek debt but about ten times that for the other PIIGS.

According to my Market ID (internal dynamics) data, last week’s damage was in a class with the seven worst weeks in the 2007-2009 bear market, and worse than all but two. The panic encouraged extraordinary action by the European Union and International Monetary Fund, stepping in quickly with a big-time emergency loan package, nearly one trillion dollars and aided by the Federal Reserve slipping in dollars via a currency exchange program to Europe’s Central Banks in Europe while the Bank of Japan kicks in another $21.6 billion.

That was some open yesterday, capturing all the day’s gains and more in the first half hour. I don’t remember another quite like it. A week ago, my headline read Bipolar Swings. Perhaps today’s should have been Bipolar Swings on Steroids. Following four 90%-down days since April 16, yesterday was a 90%-up day, the sort of action sometimes seen at intermediate turning points.

S&P 500 – Weekly (Source: StockCharts.com

Healthy Stock Pause, Or Start of a Slide? asked a headline in The Wall Street Journal’s Money & Investing sectionyesterday. It’s an open question, one that could be answered soon, but noise levels are elevated. It didn’t take long for the bears to craw out; they’ve had trouble sleeping, hibernation out of the question. More mainstream mouthpieces, tertiary and otherwise, were quick to defend the correction camp, blithely blaming the quants while huddled to stay warm and comfortable in the middle of the herd. They’ve had quite a run from the low but the truth is no one really knows. I operate under the premise, regularly confirmed over three decades, that the stock market has the best track record in answering the sort of question asked by the Journal. The key is understanding the market’s language.

Price and time overbalance is an important technical tool in that regard, often the first to detect a change in the primary trend. The overbalance rule says to expect a change in the primary trend when price and time overbalance after a three section or more advance. I count four sections from the low but it could be three. Price overbalances when an active market falls further than it has on any decline from the low and vice versa on rallies from the high. Time works the same way; it is more important than price but indications by both are necessary to determine a change in trend. Few follow this principle and I’ve never seen anyone measure in the manner I do, a method discerned from W.D. Gann.

Price overbalanced for the S&P 500 (SPX) but not time although the count is still active.  To overbalance, the SPX would have to fall below last Thursday’s low (1069.65) without first trading above a nearby level (1167.58). With just a little follow through, the SPX signals the weakness was just a correction and perhaps that was it. Even if that is the case, I suspect there’s a test of last Thursday’s low before a sustained advance but that’s bias.

S&P 500 – Daily (Source: StockCharts.com)

As for trend, the 21-day rule signaled downtrend last Tuesday and the Market Trend Indicator (MTI) shifted to neutral on that day’s close. Strength in the Advance/Decline line into the high was behind the slower signal by the MTI. The MTI went to downtrend after Friday’s close but one day later is NEUTRAL, just a little away from an uptrend reading, the SPX only a fraction below its 18% weekly exponential average (1159.82). The DJIA leapt back above its 18% average (10,763) and the NY Advance/Decline line is 2,556 net advances above its 18% average.

Net volume overbalanced earlier but including two 90%-down days, recorded peak readings Thursday, (80.6) for the NYSE and (74.0) for NASDAQ. SPX net volume recorded a (82.5) peak and the Russell 2000 (RUT) reached (71.1). I’ve never seen an advance end on a peak reading but declines sometimes do.

Eurodollar Index – Daily Close (Source: StockCharts.com

Leading sectors and groups were hit the hardest last week. That’s no surprise. There hasn’t been much change in the best or worst-performing group list as measured by relative strength weighted towards nine months. Small cap indexes fell more than large and by sector, Basic Materials and Oil & Gas, neither of which bettered prior recovery highs in April, were down the most, followed by Technology and Financials. The worst performing groups included Paper, Travel & Tourism, Coal, Automobiles, Aluminum, Recreational Products, Recreational Services and Gambling. Virtually everything bounced yesterday. Note Gold Mining is moving up the relative strength table rapidly, climbing into the top ten for performance over the past month.

Harmonic Preview:

(Higher Probability SPX Turning Point or Acceleration Days)

May 13            (Thursday)

May 27            (Thursday)

June 2              (Wednesday)

Jun 11             (Friday)

June 14            (Monday)

June 25            (Friday)

*An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.

Barclays 20-yr+ Treasury ETF (TLT) – Daily (Source: StockCharts.com)

That may have been it for the rally in long-term government bonds, a heck of a spike with flight-to-safety buying. I’ll look for an opportunity to reestablish short positions once the stock market’s picture clears up. Gold’s advance is beginning to accelerate with gold mining stocks leading the metal and gold rising despite strength in the dollar, both signals that further gains likely lie ahead as deficit time bombs tick around the world.

Gold (continuous contract) – Weekly (Source: StockCharts.com)

As for Thursday’s exaggerated meltdown, buy orders disappearing as the decline accelerated, highlighting the danger of fragmented liquidity with no common rules across alternative trading systems, the old ways didn’t work too well in panics either.


If you followed my lead and initiated short sales when the 21-day rule signaled downtrend, I recommend maintaining those positions with stops above the April 26 high. The plan is to make adjustments once the stock market signals its intentions about the primary trend. If time were to overbalance, it makes sense after the first secondary reaction, to build short positions to a size more commiserate with trading in accordance with the primary trend. That would also be the logical point for long-term investors to reduce exposure. It’s too early to make that call.

The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.