Choose Your Own Adventure: SPX 2013

Posted by DynamicHedge
on March 4th, 2012

From a previous post on fractals:

Fractals create self-similar, repeating, non-symmetrical patterns and shapes. Markets appear self-similar over multiple timeframes the same way that a fern looks self-similar at different magnification…

…The balancing of supply and demand is up to the many participants, each possessing different levels of skill and sophistication, each acting on unevenly distributed information while working towards uncommon goals. This process is what leaves the footprint of the market which appears to be moving intelligently on all time frames.

The violent selloff and subsequent grinding higher feels very unique. Some have even said this market feels “unnatural” or “rigged” due to quantitative easing, high frequency trading, LTRO, ZIRP and other boogie men. I assure you these market conditions are not unique at all. Here are 5 examples of statistically similar markets and what transpired afterwards.

These instances were identified by our pattern recognition algorithm as self-similar in form to the market conditions we are currently experiencing. The requirements for this search was a substantial selloff followed with a choppy bottoming process and a grind higher taking out the previous highs. Spoiler alert: These instances (since 1970) overwhelmingly occur in bull markets and tend to lead to meaningfully higher prices.

For reference sake, here’s where we’re at:

Instance 1:

December 1989 – July 1990

The result is quite bearish:

Instance 2:

Actually embedded in instance 1 (freaky): July 1990 – March 1991

The result: Higher prices

Instance 3:

January 1994 – March 1995

The result: Super bull

Instance 4:

February 2005 – July 2005

The result: A pullback and new highs

Instance 5:

April 2010 – November 2010

The result: This instance is fresh in our minds and most will remember a shallow pullback and higher prices.

Instance 6:

The present

To aid your visualization I’ve included the appropriate negative space for both a bullish and bearish outcome. There is room for both interpretations, but the choice, as always, is up to you.

Bullish:

Bearish:

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