Thursday, November 01, 2012

S&P 500

Here is a daily chart of the cash S&P 500 going back to the start of 2011.

At the moment this average looks like it is headed for 1310-1320, the range where the drop from the September 14 top would equal the size of the March-June 2012 drop (blue dash rectangles). You can see that the market formed a small trading range with three tops at roughly the same level after September 14. During the last half of October the S&P broke out to the downside from this range. Such breakouts after an extended advance are generally pretty reliable bearish indications.

If the market is really headed down to 1310-20 then I would expect it to remain below resistance at the lower end of the September-October trading range (red dash line) which is roughly the 1430 level. It should also stay below its 50 day moving average (black wavy line) which has started to flatten out.

As a rule the 200 day moving average (wavy red line) is a useful trend indicator. Right now it is rising and the market is trading above a rising 200 day moving average which says that this is still a bull market. But a drop to 1310-20 would put the S&P below this moving average. If the subsequent rally stalls near the 200 day moving average as it starts to flatten out I think at that point one could reasonably conclude that the long term trend has turned downward.

You George Lindsay fans know that I think we have seen the top of the domed house in the 3 peaks and a domed house formation. If so the bull market is over. A break below the 200 day moving average followed by a rally which can't get the market back above that moving average would confirm this prognosis and the top of that rally would probably turn out point 27 of the domed house.

1 comment:

Graph1159 said...

I agree that we are in a significant correction. The 3-month NDX chart looks horrible. There's a downward leading diagonal that reminds me of the similar pattern that launched the 2011 cyclical bear market.