Spy Rounding Top

The market has defied my rising-wedge, and my head-and-shoulders, but now it has to deal with “The Gigi Rounding Top.” Here is a 60-minute SPY chart of the rally so far (click to enlarge):

spy-rounding-top-4-24-09

First, look at the blue line. That was the lower edge of the rising-wedge pattern. It provided support three times, and now resistance two times. So, this is an important line to have on your chart.

The red line in the upper panel outlines the rounding pattern. The arc is almost perfect. Such a pattern is created by a slow, steady shift in supply and demand. Demand has declined, and supply has increased.

The purple line in the lower panel is a 32.5 hour moving average of volume, which gives a weekly moving average on the hourly chart since there are 32.5 hours in the trading week. I did that to smooth out the volume bumps better.

In a rounding top, or bottom, volume should generally be the mirror image of price, forming an opposite arc. For a rounding top, volume should decline on the way up, flatten-out at the top, and then increase on the way down. SPY’s volume arc is not so perfect, but it doesn’t have to be. From page 93 of the textbook:

“The volume pattern on Rounding Tops is seldom as clearly defined as at Bottoms. Indeed, it is apt to be rather high and irregular throughout the entire rounding-over movement in prices. …the volume warnings do not become conspicuous in most cases until the downtrend has begun to accelerate toward the vertical.”

The green, dotted, vertical line is drawn through the rally peak so far, and we do have a pick-up in volume since the peak. Also, if you look at the daily chart, you will see that the highest-volume day of the week was on Wednesday, a down day, and then volume tailed off as the market rallied on Thursday and Friday.

Rounding turns can be explosive. From page 88 of the textbook:

“Volume accelerates with the trend until often it reaches a sort of climactic peak in a few days of almost “vertical” price movement on the chart.”

On Friday, the market held its breath until the 2pm “stress test” announcement, and then went berserk – just like it does for an FOMC announcement. So, the market considered the announcement to be a major event. It liked what it heard, rallied up, but then failed to make a new high. The XLF and BKX also failed to make a new highs. Those failures are probably significant events.

So, this rounding-top pattern looks like it has a good chance to survive.

37 Responses to “Spy Rounding Top”

  1. junglegirl says:

    WTG Matt and Gigi! I like it— a lot. “The Textbook” also says “they almost never deceive.” (p. 93)

  2. BobD says:

    One possibility mentioned by Bill Mclaren is having the 875 area as resistance and “a rally of 1 to 4 more days that will either fail to reach the high or get just marginally above that high and then trend down with support at the 800 level.”

    I labeled my chart with two fib levels that are in the 875 area and may define this resistance.

    http://tinyurl.com/c5ratw

  3. K says:

    The Treasury Department is preparing a Chapter 11 bankruptcy filing for Chrysler that could come as soon as next week …
    This appears to be a prepackaged bankruptcy with the U.S. government providing DIP (Debtor-In-Possession) financing.

    It sounds like Fiat would buy Chrysler’s assets out of bankruptcy and the U.S. would be responsible for pensions and retiree health care benefits. According to the article, the only unresolved issue is what happens to Chrysler’s lenders.

  4. Charlie says:

    Let’s hope we don’t drop like a rock on Monday and I have a chance to get some shorts in when we hit the double top at 875. I like my chances so far, but you never know. :)

  5. BobD says:

    Selling of bank stocks needed to see a pullback.

  6. junglegirl says:

    Mish Shedlock: a great listen with commentary on Treasury, Fannie/Freddie, and the FDIC:

    http://www.howestreet.com/audiovideo/index.php?pl=/goldradio/index.php/mediaplayer/1191

    Sobering, to say the least.

  7. Yerk says:

    From a German pay site dated April 20th:
    DJ now entering the apex of a rounding top. Since 1-2 years this pattern does not work with 100% certainty anymore. Expect all TA driven market participants to pile on shorts. On a breach of DJ 8200 bear trap hits to squeeze market to target of 9400. Therefore stop-loss for shorts around 8200.

    Like in January I’m open for a last move higher. Dollar misbehaving, dax has some unfinished business in the 875-880 spx area which could gap the US up. Mind set of the US govt not bearish.

    Almost everything else is saying we go down.

  8. after says:

    Hello all, it has been a long while since I’ve wrote in.
    I’m wondering about SRS. Does anyone think this is worth a gander at Friday’s close or below ?
    thanks!

  9. Julie says:

    newbie 2—-
    The difference between this retrace and the
    last retrace is that this retrace turned the
    SPX weekly trend from down to up….the
    prior retrace did not. This means that after
    a correction the SPX will move higher. We
    think iy will play tag with its 200 DMA late
    June/early July.
    Short term the 45 day trend has not moved
    from up to down yet. Odds favor that to happen
    this coming week. The move down should bottom
    early May.
    Price and time are important factors. It takes a
    SPX move to over 1100 to turn the SPX monthly
    trend from down to up. One EW guru is calling
    for this, but we think the SPX monthly trend
    will not be turned up until after the next bottom
    in Sept/Oct or Nov.
    Always keep your eye on the directiom of the
    SPX 20 DMA.
    Hope you have a great weekend.

  10. Julie says:

    Dave—-
    Paula would like to know your thoughts
    on the dollar and oil. Thanks!

  11. George says:

    K,

    Re: “…the U.S. would be responsible for pensions and retiree health care benefits.”

    If the Fed picked those expenses up, Chrylser wouldn’t need to file for bankruptcy.

  12. Julie says:

    George—-
    Sherry says “Welcome back.” She was worried
    about you and very happy to read that you’re
    okay.
    Paula, Sherry, and I pray that you stay in good
    health and make at least a $Million this year.
    Take care.

  13. George says:

    after,

    I’ve been playing with SRS and URE 15min charts, jumping in when there’s a cross of 9/36 to the upside with exit using the same MAs or exit EOD.

    There have been a couple whipsaws but overall, nice profits. I’m evaluating the best way to automate these kind of moves. I’m looking at an additional filter to eliminate some of the whipsaws.

    SRS daily could be “getting ready” to make a move: I see the MACD tightening up. Plus, that drop from the $100s to $20s will come into play soon as Mattgic’s coiled spring has tightened considerably.

    For me, on the daily, price would need to at least penetrate the 9MA with stochastic up to 20, and normally, price will make the first move followed by the MACD.

    Like you, I am waiting on the inverse “pop”.

  14. George says:

    Julie and Sherry, thanks.

    Hope you are well.

  15. George says:

    Speaking of the Mattgic spring.

    The reason I’m so giddy about SKF is the technicals. Price has moved up to the 9MA, MACD histogram “ticked up” positive 5 days ago and the weekly stochastic is almost on a buy.

    Oh, and did I mention that $80 gap above?

  16. Newbie2 says:

    Julie,
    On my iPhone now so I can’t give you a full answer. But thanks, your thesis is interesting , and I’ll ponder it. I’m not short at the moment.

    Matt, my lastpost isn’t showing up for some reason. Maybe a glitch?

  17. George says:

    Ty Andros newsletter. There are some results from the stress test relayed here via the Turner Radio Network.

    http://www.traderview.com/economiccommentary/tedbitsEconomicCommentary.asp

  18. admin says:

    Newbie2,

    I deleted your comment. I am not interested in your opinion of me. Please restrict your comments to the markets. Do not discuss me or address me. Do not reply to this comment.

  19. Yerk says:

    @Randall – AEP sometimes has misconceptions, pretty often when it comes to Germany. Not all of it is plain BS like the subtitle under the picture. An act of individual arsonary is “civil unrest”?

  20. K says:

    http://zerohedge.blogspot.com/2009/04/one-trillion-commercial-real-estate.html

    The One Trillion Commercial Real Estate Time Bomb

    it’s pretty awesome chart of the loans maturing in 2014-2017 lol

  21. Charlie says:

    !@$@%!$#@! K.. !!!!!!

    I just read this and began searching for news on the flu outbreak in Mexico. Oddly, I haven’t heard about any of this yet on the news!! I’m scared.. very scared..

    Coffins and Mass Graves for no reason.. crap crap CRAP!!!

    If you look at this article:
    http://news.bbc.co.uk/2/hi/americas/8018991.stm

    Comes pretty close so far to the 6% fatality rate that the article talks about.

  22. Charlie says:

    Oh.. an I wanted to add that Mexico is a huge risk to the US.. with deteriorating tourism and the dependency of money earners in the US to send money back to family living in Mexico, this deep recession is definitely having a big impact on our friends in the south. If conditions don’t improve, I’ve heard that they would rush the border soon.

    Maybe that is why the outbreak was planted there??

    Someone tell me if I am starting to sound paranoid / silly.

  23. junglegirl says:

    http://health.nytimes.com/health/guides/disease/the-flu/overview.html

    Fatality rate is at most 0.6% thus far if every case was due to the same strain of flu, and so far only 1/3 of the fatalities were so documented (0.2%). For perspective, flu outbreaks occur every year (affecting tens of millions), and their mortality rates average about 0.3-0.4% or less according to what I have read (CDC and others). I’m not worried. Concern over a strain possibly becoming pandemic seems to occur at least once a decade or more. Again, I’m not worried. I also always consider the source of what I am reading.

  24. Stringm says:

    George

    You said you were in BBT Friday. Give me the entry criteria you used. Since we are both on SD I can code it and we will see if we can get it automated. Give me your MACD and STO parameters as they look on the charts. For instance my MACD is Close.8.13.5 and STO is 21,5,3. Tell me the time frame chart you enetered and what bar and I will give it a whirl. We will talk exit later.

    String

  25. K says:

    sorry charlie. let’s just forget this.
    what i found odd is the panasonic news in february lol

  26. SAV says:

    K,
    I like your links. So how do we, the retail investor short the CMBS market? Isn’t there a commercial real estate ETF? Does anyone know?

  27. K says:

    SAV thanks.
    I wonder that too. Now i agree more with Roubini that it’s an L shaped recession.

    we won’t be out until 10 years from now. (of course the stock market is irrational and might ignore these fundamental trillions)

  28. junglegirl says:

    A peek at the VIX:

    Daily: PPO showing positive divergence (1/06 – 4/20)

    Weekly: PPO histogram easily shows that same positive divergence. We have gap fill from September. Also, note the general zone of 30-40 and how it acted as resistance for many months and now has provided some support. It doesn’t look easy to fall right through that zone, which fits with the SPX rounding pattern.

    Free charts of this so hopefully everyone can see:

    http://stockcharts.com/charts/gallery.html?%24VIX

  29. junglegirl says:

    Forgot to add: if/when we recapture the 200d (40w) MA on the VIX, watch out bulls.

  30. K says:

    Some of you may know that the local and federal governments have put out memorandums to delay foreclosures in September of last year but as those ended in January, notices of default went out to the market during the first quarter of this year in record numbers. Since foreclosures usually come onto the market around seven months after a notice is sent, it means the troubled house listings will flood the market starting July of 2009.

    http://moneyning.com/misc/market-crash-coming/

  31. Randall says:

    Another housing related article with some excellent commentary about bubbles generally:

    http://www.oftwominds.com/blogapr09/housing04-09.html?ref=patrick.net%5BU

  32. Randall says:

    Oops, here is the blog link, also a nice article on Swine flu and the markets:

    http://www.oftwominds.com/blog.html

  33. marty says:

    Swine flu… now there’s a black swan.

  34. Charlie says:

    Hey Gang,

    not sure about this conspiracy theory of the US being behind the swine flu, but whatever it is, people are afraid enough to be selling the futures which are currently down 2% or so. I’ve always been a fan of stories about hidden govenrment and conpiracies and such so this stuff just plays right on me. Don’t worry K, I didn’t spend the day stockpiling supplies and building a bomb shelter :)

    What is strange about this one is that most of the 86 that have died so far were between 20-40 and hence this is definitely a strong flu virus.

    BTW.. great short on Friday Matt. Looking better and better by the min.

  35. K says:

    charlie i have just entered the spectrum. it seems like all cases in the US are from people traveling to mexico. I hope none of my friends have

    I will not greet a girl with a kiss on cheek nor will i shake anyone’s hand for a while on top of that i will use antibacterial solution LOL