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S&P 500:
Examples of a Long-Term Analysis



June 14, 2005

We define a long-term trend as a broad market trend that commonly persists over several quarters or even several years. No matter what timeframe you trade - the short-, mid-, or the long-term, our position is that you should always know about the market's prevailing long-term direction.

In our analysis we use chart with a 2 year, 5 year, or even 10 year view to study long-term volume surges. Such surges provide clues about the potential for long-term index reversals. The appearance of such long-term volume surges that a large number of shares is being transferred from one group of market participants to another. It is at such inflection points that the market can become "overbought" or "oversold".

A review of the events that led to a previous long-term index reversal point will provide us with the necessary perspective for an analysis of the current long-term market outlook.

Chart #1: S&P 500 index 5-year chart. 2001-2005

Chart 1 shows a number of significant volume surges that appeared between 2001 and 2005. The selling volume surges seen at points A and B are mid-term surges to the downside. Ideally, they are best studied on a smaller timeframe (i.e., a chart view spanning less than 2 years). We show these surges here for comparative purposes - in order to contrast them to the much larger selling volume surges at points C and D. Both in terms of magnitude and duration, the surges that developed at points A and B remain well below those seen at points C and D. It is not surprising then to find that the S&P 500's reaction to the surges at A and B remained limited to a move of about 10 - 15%. In contrast, the volume surges to the downside that occurred at points C and D have both a higher magnitude and duration and they occurred over 4 months apart (at the end of June 2002 and at end of November 2002). As a result, the cumulative effect of these surges led to the establishment of a much stronger index reversal and prompted a much more significant index move than the surges at points A and B. In fact, the long-term uptrend they prompted is still ongoing and now in its 3rd year. Thus far, the S&P 500 index has already gained more than 20%.

Point E marks a mid-term buying volume surge that peaked near the beginning of a long-term uptrend. Typically, our volume methodology assigns less significance to buying volume surges that appear at the beginning of long-term up-trends. Surge E disrupted the uptrend for only about 2 months. Compare this to the buying volume surge at point F. It occurred much further along the by then well-established uptrend and its impact on the uptrend was thus much more pronounced. It halted the index's advance for more than 7 months (i.e., from January - August 2004) and led to an index decline of over 6%.

We consider the two most current volume surges - appearing at points G and H - as a single, prolonged volume surge that began in October 2004 and ended in May 2005. We believe this cumulative surge has the potential to affect the market over the mid-term, and we think it could temporarily disrupt the long-term uptrend. The majority of these surges occurred while the index was consolidating sideways and during the S&P 500's down-move in March and April 2005. An analysis on a smaller time frame would show that most of the surges were during the price advance (see November-December 2004).

By comparing the volume surges at points G and H with those at points C and D, we find that the volume surges at C and D are much more pronounced and that they display a higher magnitude. These surges are clearly selling in nature (i.e., they are volume surges to the downside). In contrast, the surges at points G and H are of a greater duration but of a lesser magnitude. In addition, these surges are not 100% buying (they also have selling components - April 2005).

Table #1: Average daily trading volume for various major indexes broken down for various timeframes between July 2002 and May 2005.

 

Average Trading Volume by index and timeframe

 

July-Nov. 2002
(Support Corridor)

March 2003-Nov. 2004
(Uptrend)

Nov. 2004 - May 2005
(Last 7 months)

S&P 500

2,022 M (121%)*

1,667 M (100%)

1,850 M (111%)

NASDAQ 100

1,493 M (130%)

1,144 M (100%)

1,295 M (113%)

DJU

      6 M (150%)

     4 M (100%)

      5 M (125%)

* Percentage shown in comparison to the average daily trading volume in March 2003 - November 2004

Table 1 above illustrates that during the corridor from November 2004 to May 2005 there was a rise in average volume (mostly buying volume) and for the indexes listed it was 10 - 25% above the average volume during the uptrend from March 2003 through to November 2004. But this average buying volume is much smaller then the average selling volume during the support corridor from July through to November 2004. That shows very good chances for a long-term uptrend continuation, and also shows that the market, before such uptrend, could experience a good correction.

An extensive correction may be necessary to fully account for the buying volume surges encountered in November and December 2004 as a well as the May 2005 buying volume. However, a great deal depends on how the market will react on high volume activity during the last 7 month. If markets continue to ignore the buying volume to the upside and move higher on a higher volume discounting the surges at C and D, it is likely that during the next few months it could move to the level where it will become extremely oversold and ready for long-term down-trend (depending on the magnitude of the volume that will be generated during this movement). We think that this scenario is unlikely.

On the other hand the market is already ready for a deep mid-term correction and if the market moves down into mid-term correction by generating high selling volume, the long-term uptrend could be prolonged for a longer period. This is a more likely scenario.

Disclaimer: The chart example is intended for educational purposes only - it does not constitute trading advice, nor does it make or imply any market trend predictions.

 

NASDAQ 100 Examples:
April 2006 (Short-Term)
March 2006 (Short-Term)

Example 1 (Mid-Term)*

Example 2 (Short-Term)*
Example 3 (Short-Term)

Example 4 (Long-Term)
Example 5 (Mid-Term)

Example 6 (Mid-Term)
Example 7 (Short-Term)

S&P 500 Examples:
2005 Mid-Term Summary
2005 Mid-Term Summary (trades)
July 2005 (Mid-Term)
June 2005 (Long-Term)
March 2005 (Short-Term)
April, 2004
April, 2004 (Long-Term)
April, 2004 (Mid-Term)
March, 2004 (Short-Term)
Example 2 (Mid-Term)

Example 3 (Short-Term)
Example 4 (
Long-Term)
Example 5 (Long-Term)
Example 6 (Mid-Term)
Example 7 (Mid-Term)
Example 8 (Mid-Term)
Example 9 (Short-Term)

Example 10 (Short-Term)

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