I have been playing around with these Ichimoku charts and I realised that there was a very intesting setup on the weekly S&P 500 chart right at the top of the market in 2007 ahead of the GFC. Maybe we can see this again this year sometime to pick the top of the bull trend and the start of the bear market.
I realised that the Chikou span (the purple line) gave us a warning that a major change of trend was in play. This might look complicated at first but let me explain this by the numbers.
1. The weekly MACD gave us a warning in late February 2007 (the year the GFC started)
2. This is the Chikou span cross, which is our indication of the major long term trend reversal but this does not happen until the support breaks at point 5 because the Chikou span is 26 candles behind. That is what makes it so interesting. Stay with me here and I will explain it more as we go.
Click on chart to enlarge
S&P500 weekly chart showing the market top in Oct 2007 ahead of the GFC.
3. Point 3 looks like a top reversal but remember as this was unfolding the Chikou span was still above the price at this stage because it is 26 candles back. We can see something interesting though here. If we look 26 candles back from point 3, the Chikou touched the top of the weekly candles but it didn't cross below.
4. Here we had something interesting happen again. The slow stochastic crossed below the top line but the price diverged back into uptrend while the slow stochastic continued down. The SPX went on to a new high on the back of irrational exuberance.
5. Here we have a classic top reversal. This is where we see the interesting part. At this point we got a lower weekly high then the break of support on the next candle. If we look back 26 candles we see that the Chikou span has crossed below the candle trend line. The breakdown candle in the first week of November hit support at the top of the cloud. This support was from the previous low.
6. This is why you need the other indicators to go with the Ichimoku. If we look at the MACD, it is crossed down again but the candle has had a bounce off the top of the cloud in mid November. If you just used the cloud on it's own you would not know what was coming. However if you look at the weekly MACD we can see that this is a false rally because the MACD was in strong downtrend. There was a rejection off the resistance that formed the support for point 5. Again if we look back 26 candles the Chikou span also tested the resistance.
Then we saw the reversal back down into the cloud and out the bottom of the cloud. This of course was the start of the GFC. At point 5 and 6 that was our indication that this was a major confirmed reversal. Had we got out in Novemeber 2007 at any time during that month we would been right at the top of the reversal.
Say if we had got out at 1450 in November 07, you could have shorted the market all the way down to 683 which was the first week of March 2009 when the Fed first started QE. The Chikou span crossed back up through the candles in the first week of May 09 when the 900 resistance was broken. That indicated the major uptrend was confirmed.
So, to summarise, the main point of this is that I am looking for the same top on the S&P 500. I expect to see it this year sometime. If I see the weekly break of support and I look back 26 candles and the Chikou span has crossed down through the candles, then we can be fairly sure that it is a major, major long term trend reversal warning. Lets see how it goes.
Below: The S&P 500 weekly chart as it looks now at the time of writing 11/4/2014. Could that red circle turn out to be a major top? We need to wait and see if it is confirmed. You can see the weekly MACD is crossed down. That is our early warning signal. The slow stochastic is turning down but it is still above the top line so we need to see that below the top line. The Chikou span is still above the candle trend line but 26 candles back from the current price. By my calculation, we should cross down in early May sometime. I expect the Chikou will cross below the 1780 support (which would be early November on the chart if it was early May when the candle breaks support) so that means the weekly candle at that time (in May) will also cross below 1780 but it will be 26 candles ahead of the Chikou, just like at point 2 and 5 in the 2007 chart. It might seem confusing but it will become more clear as we go on. Lets see how it turns out for interest sake. It might be the best warning signal we ever had. As I wrote in a previous post. The S&P 500 is 15.2 x earnings which is exactly as overvalued as it was in Oct 07.
S&P 500 weekly chart (at time of writing)
No comments:
Post a Comment