Monday, December 5, 2011

Gauging SPY rally with IBM

In Saturday's post I said that I will buy the weakness in SPY (hopefully we are about to get that due to S&P EU credit downgrades worries this afternoon) to ride the rally into the year end. I also would like to gauge where this SPY rally may culminate. For this task I decided to use the bluest of the blue chips - IBM. This stock has correctly predicted all the bottoms and tops in SPY since November of 2008.

Below is the chart that shows the correlation between IBM and SPY. You can clearly see how IBM holds the ground on SPY sell-offs and leads SPY on the rallies. When IBM tops, SPY follows on the sell-off.
Also I show (on another chart) how IBM likes to extend its fib to 78.6% and sell off at that level.

This is what I am expecting to happen at this time as well. IBM is making new highs and is getting ready to take SPY along with it. After hitting a double top on Buffett's purchase announcement, the stock has been weak and filled open gap @ 177, predicting a severe weakness in SPY. Gap fill has served as a buy signal, and strong rally of last week took it to historic highs today. SPY is lagging a bit, but should break through the downtrend soon (just like previous times, shown on correlation chart).
IBM likes to rally into the earnings. So sometime in the middle of January IBM should hit $207, which is 78.6% fib ext. I intend to use that catalyst as a final target for SPY rally.

(click on charts to enlarge)


IBM fib ext

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