In times of turmoil a look at a longer term chart can calm the nerves.Here is a point and figure chart of the cash S&P 500 index from the beginning of 2002 to the present. The vertical size of each box is 10 S&P points and it takes a 3 box move to show a reversal on this chart.
The first thing to note is the red trendline. On my point and figure charts I like to draw trendline which advance or decline at 1 box every 1, 2, or 4 columns. The advantage of this method is that the trendline can be drawn as soon as a high or low has been identified. In other words, it only takes a single high or low to define a trendline. This contrasts with the standard approach which requires a pair of successive highs or lows to define a trendline.
In any case you can see that the red trendline which advances 1 box per column was tested 5 times during the 2003-2006 period which makes it likely that it is a very significant support line. This trendline currently stands at 1390 in the cash S&P. This is important for two reasons. First, this level is not far from today's low (so far) at 1419, thus suggesting that the drop from the July top is much closer to its end than to its beginning. Secondly, the 1390 level is above the last significant low on the chart, the March 2007 low around 1360. This suggests that the sequence of higher lows which has defined this bull market will remain intact.
The worst downside target from the July top which can be calculated on this chart is obtained by multiplying the width of the top (horizontal red line) by 3 (because this is a 3 box reversal chart) and then subtracting from the high. The resulting downside target is 1360 and this too suggests that the sequence of higher lows will remain intact, especially because the market usually stops well shy of a downside count target in a bull market.
What is the upside potential? Well the count across the base for the bull market which developed during the July 2002 - March 2003 period projects an ultimate top around 1640 in the cash S&P. Counting across the much smaller base which has devloped over the past couple of weeks gives an upside target of 1610. I think we shall see the cash S&P trade above 1600 by the end of this year.
7 comments:
Chart was nice it kind of lets people know where you are coming from.
But I would like to point out a parallel line that includes the march 2003 low could be drawn below your red line. I see know reason why your red line can not be broken, and this parallel line become support for the bull trend.
Admittedly it would take a significant event, like maybe a cash crunch to do it but it seems possible to me. Additionally support lines were meant to be broken eventually why can this not be eventually and we go even lower?
I like your analysis. I like it even more that I understand where you are coming from, but I think the liquidity issues are going to take precedence to technical analysis for the next few months - I think - maybe - you never really know do you?
Hi Carl,
I've been a big fan of yours since discovering your blog last year. Thanks for making your market analysis public, and for going into detail at times like you've done today with this chart.
Is there a book (or books) you would recommend (or courses even) that explain the theory and practice of using point and figure charts? (I know you said you don't answer questions that come in from the comments, but maybe someday you could post this info on your blog.)
Anyway, thanks again for the great site!
Greg K
And support is blown out yet again.....
Greg, here is his theory: Get a coin and flip it. Heads are bullish Tails are bearish. then come up with bunch of charts to back up your bullish or bearish case. LOL
Charting is nice, but if liquidity is shrinking all markets will go down.
Carl,
Thank you for providing the longer term view of the SPX. It certainly assists me in better understanding your commentaries on the markets.
I assume that based on your point and figure chart and comments that the SPX value of 1360 is the defining boundary between maintaining a bull or entering a bear market on the basis of having a lower low than the foundation of the last rally. Defining the change from a bull to a bear market versus a bull market correction using various technical methods at the earliest feasible point in time has recently been a keen point of interest for me.
Thanks again for taking the time to help educate us about your methods.
Carl,
Your clear-cut analysis has always benefited me throughout the year. Your generosity to share your analysis should be applauded even more.
Henry
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