Last time I posted the contrarian long term S&P chart when the consensus was predicting a bear market there was some interest so here's an update after the last 2 days volatility.
To re-cap, the channel represents a 500D SMA adjusted for observed error (click the link above for an explanation of error).
The two common price based measures of fair value are mean reversion & momentum.
Mean reversion is betting that fair value is the mean (in this case the midpoint between the channel lines) and if price is above the mean it's overpriced & the opposite when below.
Momentum is the re-pricing of the asset. If a chart is ranging sideways there is no momentum and the asset is fairly priced however if the long term mean is moving up or down there is momentum.
The oscillator above shows the S&P price over the 90 year period. 0% represents the mean and the orange lines represent the 'most probably lye' boundaries.
Both charts show that when price breaches the upper boundaries of the channel it is rarely a short term event but rather a longer more sustained display of momentum (a re-rate) driven by economic conditions.
Zooming in (2015 to today) the S&P has briefly entered the Overbought positive momentum zone and last night it retraced to 19.4%.
If the market were to change momentum to the downside, this would be atypical of historical moves.
For mine today's retrace is a buying opportunity and the current bull market has some way to run (years).
