Submitted by Chris Capre of Second Skies
Weekly Kumo Break Suggests Long Term Structure Changing
For those of you who are familiar with the Ichimoku Kinko Hyo (One Glance Balanced Cloud Chart), one of its strengths is in communicating when major long term trends are beginning and ending. This can either be done through the TKx signal (Tenkan-Kijun Cross) or a Kumo Break (cloud break). Based on our Ichimoku analysis, we suspect the SPX is headed for much lower ground as an event that has happened only twice in the last 8 years has just occurred, a weekly Kumo Break.
One of the unique aspects of the Ichimoku Kinko Hyo is the ‘Kumo’ which often contains instruments in trending environments. When broken however (especially on longer time frames), it often signals a major reversal. How has the SPX related to the Kumo in the past? Since June of 2003, the SPX has maintained 81.2% of its time above the Kumo and only broken it once back in mid-Jan 2008 (when the market had started its major reversal). Until now.
Two weeks ago during the panic sell-off in the major indices, the Kumo was broken but the market failed to close below it which is often a trigger. The last time the market closed below the weekly Kumo (Jan. 18th, 2008), it did not close above it for another 87 weeks. This prior close back in 2008 marked the beginning of a major bearish move down from the break at 1401.25 to a low of 666.79 (a 737.46pt move).
Looking at the chart below, last weeks close in the SPX marked the 2nd close below it in the last 8+ years. To us, this is very suggestive the technical structure (from an Ichimoku perspective) is decidedly bearish considering the rarity or uniqueness of this event and the SPX’s ability to hold above the Kumo for such a long time is no longer there.
What is also interesting to note is the time it took for it to break back below the Kumo after regaining the air above it back in late August 2009. The fact it had such a long run above the Kumo from June 2003 – Jan 2008, was below it for 1yr and 6mos, then above it for only 2yrs, only to break back below it suggests the underlying weakness of the larger term structure.
Furthermore, the rate at which it fell from the recent highs back in May of this year to now was far more violent than back in 2008. It is ironic to note that the time it took to go from the highs back in 2007 (week of Oct-12th) to breaking the Kumo (week of Jan-18th) in 2008 was a 13 week process…the same amount of time it took for price this time to reach the early May highs this year (week of May-6th) to the Kumo break this year (week of Aug-12th)…again a 13 week process.
Ironic perhaps, regardless, it’s rare instruments like this with such a long history above the Kumo, break it on the weekly time frames, only to resurface back above it. The combination of the recent violent sell-off, along with the historical Ichimoku perspective on this, and the long term structural outlook has turned quite bearish. We expect the index to remain below it for some time, likely the end of the year with perhaps a small retracement back towards the 1220 region capping any rallies.