Dick Arms, who 2 weeks ago warned of a correction, thinks this can still work lower, perhaps to 1330 SPX:

 

 

Arms:

“Even though it looked, based on my technical work, as though the markets were likely to drop, the slide last week was certainly sudden. Moreover, volume came in with more emphasis on the downside, trading ranges expanded and so did volatility. None of this comes as a big surprise. The clues have been in front of us for nearly two months. Important market tops are usually accompanied by tighter trading ranges and lower volume. The VIX is usually at a very low level. The Arms Index is low, especially on the longer-term measurements like the 55-day. The Market Seismograph is quiet. The APC (Absolute Percent Change) moving averages and the RSI are at or near a high area. The component lines of the MACD are near the top of the chart, but may not be crossed to the negative side.

Across a major top the volume often starts to swing toward the sell side ahead of a drop. The markets are likely to stay in a sideways consolidation for some time, building a cause for the later effect. The wider the top the longer the likely slide. Often the more speculative issues start to weaken ahead of the blue chips. All these things suggest a top, but do not tell us when the change is coming. But a successive breaking of ascending ever less steep trendlines is a clue. However, it is not until an important support level is broken with increasing volume and a widening of the trading range occurs that the red flags really go up. All of the above are now behind us.

Tops and bottoms signal themselves very well technically, but it is the in-between moves that can be difficult. At this time, having seen such a sudden drop, we have to ask ourselves if it is now over. Have we eliminated the weak holders, washed out the selling, and set the stage for a new advance? If so we should have seen very large trading ranges, extremely heavy volume, panic selling, a very high VIX reading, very bearish Arms Index moving averages, short and intermediate term, and possibly the reaching of a historically significant support level. So far I do not see that. On the next few pages we will look at a number of these factors.

First, lets look at the chart above, on page one. I guess I could have erased the question marks I had inserted in previous weeks. We seem now to have a nearly classic head-and shoulders in the Dow Industrials. We had, in the last two weeks, been watching this pattern building, and noting that the12,950 level was the neckline. We also said that a break of that line would suggest a drop of about the same depth as the distance from the top of the head to the neckline. That could be around 12,200. That is still as long way away. That is not to say we must go there immediately, but it looks reachable in this decline. It implies that we are going to eventually see a washout that takes us to that vicinity.

Lets look too at the volume. Note the width of the Equivolume boxes in the last month. The wider boxes have been seen on the downside. The volume got heavier and the trading range expanded on the penetration of the bottom of the consolidation. But, additionally, note that it was heavy but it was not the sort of extreme volume nor the big spreads we see on major market lows The volume was heavy enough to say we are seeing money leaving the market but not so heavy as to suggest capitulation. Just the fact that we have dropped so far so quickly suggests we could see a short-term attempt to rally in here, but the lack of volume says it is not likely to be a lasting low.

 

 

The Nasdaq chart above is again showing us that the more speculative stocks were telling, two weeks ago, of greater weakness than the Dow or S&P 500. Here too the volume has been heavier, but not so dramatically heavy as to be a sign of lasting support. We could draw a channel along the recent highs and lows and conclude that we are at the bottom of the channel, which might justify at least a holding action, but I do not think I would want to risk much money on such a rally possibility.

 

 

Source:
Probably Not Over
Richard W. Arms JR.
Arms Advisory, November 12, 2012

800 WAGON TRAIN DRIVE SE ALBUQUERQUE, NM 87123
OFFICE (505) 293-4438

Category: Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “Probably Not Over”

  1. ben22 says:

    Thanks for the update BR. Many of the techs I follow have been short term bearish, Mark Minervini, Glenn Neely, Tom DeMark, among others. Thats not to say they are all shorting, but caution at the minimum.

  2. Frilton Miedman says:

    Not debating the premise, but it seems to be heavily weighted on the H/S pattern

    Isn’t every correction within a rally an H/S pattern?

    Remembering the Summer of 2010, when every blog was ablaze with warnings of that H/S, and from there the market soared.

    To me, it seems like the better analysis would be to parse the source, in this case political/fiscal cliff, and yeah, good luck with that.

  3. rocketgas says:

    so how long back to break even?

  4. Nice to see ben22 commenting.

    I agree that it probably is not over. The volume observations made by Arms are very pertinent. We didn’t see capitulation. Furthermore, at crucial pivot points, volume has been bearish (namely, new lows were on higher volume than preceding ones, whereas new highs were on lower volume than preceding ones).

    To increase our worries the Dow Theory is very close to flashing a primary bear market signal. If the Transports violate their 09/28/2012 secondary reaction lows, then a primary bear market would have been signaled, which would suggest that the downside has much more to go.

    Here you can find the details of the impending Dow Theory primary bear market signal:

    http://www.dowtheoryinvestment.com/2012/11/dow-theory-special-issue-is-primary.html

    Regards.

  5. [...] you missed yesterday afternoon’s technical discussion from Dick Arms, you are advised to go read that now . . . PERMALINK Category: [...]

  6. [...] Technical analysis holds that this correction is ‘probably not over’ (TBP) [...]

  7. ben22 says:

    @ Frilton,

    “Not debating the premise, but it seems to be heavily weighted on the H/S pattern”

    Arms presents several other reasons above why he gives the cautious outlook. Most techs, myself included, will tell you that price analysis is the most important of them all, thus a larger focus on the price/head and shoulders

    “Isn’t every correction within a rally an H/S pattern?”

    No, def. not. As just one example, look at last November on a daily chart.

    “Remembering the Summer of 2010, when every blog was ablaze with warnings of that H/S, and from there the market soared.”

    Indeed, many times it is true that failed patterns contain the most powerful moves on the other side of them. This is a very basic point people that don’t practice technical analysis often miss. As one example, there was a failed head and shoulders top in the summer of 2009 that was an even more powerful signal when it did not play out, we were only around S&P 900 or so when that took place if I’m not mistaken. One thing I sometimes do to get a better read on H&S patterns is to use the On Balance Volume indicator….. but I am not a pattern trader.

  8. [...] Probably Not Over (The Big Picture) Disclaimer: Do not construe anything written in this post or this blog in its entirety as a [...]

  9. [...] At Big Picture, Richard Arms suggests the sell-off is likely not yet over. [...]

  10. Frilton Miedman says:

    Ben22, thank you for the reply.

    I see charting like a vitamin, a compliment to a whole diet, but I’m not a professed pro.

    To me, it seems more prudent to prioritize what moves the market first and then to use other “vitamins” to supplement the argument.

    In this case, the fiscal cliff and/or Fed policy, spending cuts and taxes seem to be what will determine the outcome for a forming pattern or a failed one, no the other way around.

    I’m more concerned with what’s getting cut, which sectors, prior to observing volume, indicators or patterns.

    Should I short defense?, dump yield stocks if the cap gains on dividends goes up?
    How will a payroll tax hike effect retail, discretionary/staples?

    These are the things concerning me, secondary to the H/S for short/long queues for best entry.

  11. ben22 says:

    Frilton,

    I had sort of thought thats what you were saying in the post above. I also think what you are trying to do, to define the fundamental that is driving market price, and then from there forming a trading plan and forecasting where markets will go in response that, while not impossible, is very, very hard to do. I wonder what individual would have the time and resources to do it well.

    Let me try to explain that relative to technical analysis, the topic of this thread.

    As a technical trader I am already at an advantage over you because I do not need to forecast my data because the market is my data. When you use fundamentals for investing purposes (and I’m not saying people can’t) it requires a forecast of the fundamental data itself before conclusions about the market are drawn. Then the analyst has to take a second step in coming to a conclusion about how those forecasted events will impact the markets. You have to get more right than I do, in other words.

    The most popular example of this (though global macro forecasting is now giving this a run for its money as most popular) is the herd of analysts on the street that forecast companies earnings for both the current year and the next year. It’s no wonder most of them are doomed from the start because even the idea that a correct earnings estimate is the basis for choosing the right stock in any given year is suspect and hard to square with the evidence. Barron’s usually reveals this annually when they review the 30 stocks in the Dow. I think it was 2005 when one of the more drastic examples was given, where they showed that picking the 10 dow stocks with the best earnigns estimates had a 10 year cumulative gain of ~40% versus the 10 with the worst estimates which had gained ~140% cumulatively. Shiller also did a nice job in Irrational Exuberance in confronting the old Peter Lynch add that claimed “earnings drive stock prices”

    All of that aside, I would like to say that if this was all simply fiscal cliff and/or Fed policy it doesn’t not fully explain all of the intermarket movements we are seeing….I’d argue if you wanted to claim it was the fiscall cliff that its less about the cliff itself and more about investors perceptions of it, and that this is what is constantly driving markets at all degress of trend: psychology/perception, rather than a rational contemplation of “the issues” by the majority of market participants.

    Most techs will tell you all of these hopes, fears, dreams, as well as the orthodoxed researched opinions of analysts….about taxes, or the fiscal cliff, the Fed, Europe, china, the US, politics….whatever…. they are all reflected in the the price action in the market….the market isn’t discounting the future like so many claim it does so much as it is measuring that collective mindset in real time, like a barometer.

    Perhaps I’d even agree that fundamentals “eventually” matter…but eventually could mean 6 months, a year, 10 years, and in the meantime what does that mean for the individual?….so fundamentals might be a great way to buy companies/businesses, perhaps not a great idea to buy stocks based on that though

    unfortunately due to current work restrictions I have to stay somewhat anon on this site but I am a Chartered Market Technician so I’m well versed in all things technical though Im most certainly not an expert in all technical areas.

    btw, I just cracked open Capitalism and Freedom again recently…I don’t agree with all Friedman’s claims…not in the least, but I most certainly always learn a great deal from him.

  12. ben22 says:

    hmmm, guess my response went off to blog limbo Frilton

    I had some other extremely valuable insight but the other comments have escaped me now, which means it probably wasn’t that valuable anyway.

  13. Frilton Miedman says:

    I hate when that happens, seriously.

  14. Frilton Miedman says:

    Well, well Ben, looks like it appeared. -

    ben22 Says:
    November 13th, 2012 at 4:02 pm

    ” btw, I just cracked open Capitalism and Freedom again recently…I don’t agree with all Friedman’s claims…not in the least, but I most certainly always learn a great deal from him. ”

    ~~~

    I say the exact same thing.

    He wrote that book based on idea’s for the 1950′s, when top marginal rates were 90% and unions were 400% more prevalent, to use his philosophy now requires less literal adherence, more interpretive.

    The biggest problem now, how the MSM and right wing pundits have reinterpreted his theories into the same category as Hayek or Rand, Friedman was opposed to monopoly & concentrated power, Austrians ignore it as a threat altogether.

    That said, I get the gist of your response, it boils down to your saying your a technical trader first, that’s where you start from.