Analyzing the S&P Extension Chart

There has been considerable conversation recently that the market may be stalling without being overextended which in the past has been a necessary condition for the market to stall and rollover.  The extension chart of the S&P is the truest gauge of when a market is overextended and oddly enough both the bulls and the bears are currently touting this same chart as confirmation of their view.  

Taking a look at the extension chart I posted below:

click on image to enlarge

It's easy to see that the S&P starts becoming moderately overextended when it reaches approximately 200 points above its Day 324 EMA line, which represents midterm neutrality (shown with a green line).  The market reaches maximum over-extension when it is 225 points above the 324 line.  

Over the past two months the S&P has stopped at the pink resistance line shown, well below its normal peaking level.  The bulls argue that this is actually a good thing as the market has plenty of room to run, approximately 40 points before it reaches maximum over-extension.  The bears claim the same chart as support for their argument that the market is about to take a hard rollover.  Their view is that the market has been trying for two months to climb on up to its normal over-extension peak as it has done repeatedly in the past few years but there are simply too many sellers and no longer enough buyers willing to participate.  

It may be the case that both sides are right in their view of this chart and the outcome will be determined by which side starts suffering defectors to the opposing camp first.

Trade well my friends

Alan

S&P: Rising Wedge vs Ascending Triangle

Over the past two months, we have seen the choppiest sideways action than we have seen in years.  There are two clear camps of thought on where the market sits right now.  The first group composed primarily of bears and those who recently exited after bagging a triple on the S&P in six years are pointing to the ominous nine-month wide bearish rising wedge pattern or "exhaustion wedge" as many call it, as shown in the weekly bars chart of the S&P below.

(click on image to enlarge)

On the other side of the coin we have the bulls that are pointing at the daily chart bullish ascending triangle approximately four-months wide, shown in the following chart.

The bulls are pushing the theory that we are breaking out of the day ascending triangle right now but the bears won't buy into it, reminding us that this S&P breakout just stopped at the upper line of the weekly rising wedge pattern.

Taking a look now at the Bernanke/Yellen four-year breakout channel shown in red lines in the chart below, we see that the S&P is continuing to work its way farther out of that channel with the upper level of its current trading range clinging to the lower line of that four-year channel by its fingertips.  

Lastly, taking a look at the VIX (Volatility Index), we see that it has been shuffling sideways for the past couple of months around the 12.50 level, as shown in the chart below.  This level in the past has corresponded with tops in the S&P.  

The VIX could easily continue sideways for another few weeks until it gets to the huge blue downtrend line.  At that point, there will be some serious soul searching among traders and investors.

Trade well my friends

Alan