S&P 500: Using Comparison Analysis For An Edge

Multi timeframe, as well as comparison analysis, have many benefits. As traders, we tend to utilize the shorter-term time frames to enter our trades and place our stops. But big money is made from gleaning information from the longer-term charts. We would classify long term as monthly or weekly while short term would be a daily or 4-hour time frame.

Comparison analysis can be done by comparing different periods, or we can see how our market is trading vs. another highly correlated market.

Since we have a lot of subscriber interest in stocks, we thought it might be time to compare the current chart of the SPDR S&P 500 (NYSE:) to the during the 2002-2009 period. The S&P 500 weekly chart experienced a nice bull market with several buy points from 2002 up to 2007.

S&P’s 2007 top occurred at its 2.0 or 200% extension of its 2002 high vs. low. Then about 5-months later sold off a little over -20%. After hitting the key -20% psychological end-of-bull-market area, the S&P rallied for several weeks up to its 1.618 overhead resistance. Then after turning back down at the 1.618, the S&P lost approximately -50% of its value. The complete drop occurred over a 17–18-month period from peak to trough.

SPY/S&P 500 Weekly Chart

SPY VULNERABLE TO ANOTHER -8% DOWN BEFORE STAGING A DEAD-CAT BOUNCE

SPY is down approximately -12 to -13% from its peak for 2022. It is feasible the SPY could fall another -8% or reach -20% before it stages some type of rally into late summer or early fall. If this scenario plays out, we should then prepare for what could be a significant drop or bear market in the 4th quarter of 2022 that could extend into 2023 and beyond.

The 2007 top of the S&P 500 index occurred at 2.0 or 200% of its previous major high-low swing low. The 2022 top for the SPY also occurred at 2.1618 or 200% of its COVID high-low swing low.

The potential exists for the SPY to pull back -20% from its peak before staging a temporary rally to a lower distribution top.

SPY/S&P 500 4-Hour Chart

USD CONTINUES TO MOVE HIGHER

We are now seeing that major economies (US/UK/Japan) are not immune from global deleveraging and . Investors have been seeking safety in the and this may eventually trigger a broader and deeper selloff in U.S. stocks. As the USD continues to strengthen corporate profits for US multinationals will begin to disappear.

A CANARY IN THE COAL MINE: BERKSHIRE HATHAWAY

Around 1911, miners would carry canaries into coal mines to give them an advanced warning of danger. This phrase or analogy is also utilized by traders in the financial markets. Our canary or canaries would simply be a market or stock that might give us an indication that there is a problem with the overall market or that the global equity markets are shifting from a bull to a bear.

Berkshire Hathaway (NYSE:) founded and operated by famed Warren Buffet is a diversified holding company that owns subsidiaries that engage in insurance, freight rail transportation, energy generation, and distribution, services, manufacturing, retailing, banking, and others. It is a good candidate for “a canary in the coal mine”, in our case the stock market. 

Berkshire is down approximately -9% from its 2022 peak but remains up +10% year-to-date. BRK’s stock price reached 200% as its shares traded above 2.618 and 2.666 for a few days before selling off. From its COVID low on March 23, 2020, to its 2022 high on March 29, 2022, BRK rallied 2 years and 6 days from trough to peak.

If BRK were to lose -20% from its peak or give back all its 2022 gain in the stock price we should prepare to sell the rally that follows if we have not done so already.

BRKa Daily Chart