by David G. Hawkins
One word describes how the S&P 500 ended – Flat. It opened the year at 1257.62 and closed at 1257.60. That’s quite a statistical oddity! At the high of the year it was up 9% and at the low, down 15%, but ended flat.
Very Long Term – the quarterly bars chart
The chart here is the quarterly bars chart from the early 1980s. Let’s talk through the major moves shown here.
• The giant accelerated very long term uptrend powered by the baby boomers launched in mid 1982 and finally topped out in the first quarter of 2000. The green support curve starts at the beginning of this uptrend, as does the TopFinder, TF1, which is fit to the 1998 pullback. That uptrend was a 1,420% gain.
• The tech bubble burst in 2000, resulting in a -50% hit, down to the end of 2002.
• The recovery ran from the end of 2002 to the end of 2007, resulting in a 105% gain, topping out just about where it was at the tech boom peak in 2000. The TopFinder TF2 tracked this accelerated uptrend perfectly.
• The crash of the Great Recession took the market down 58%. But in March of 2009 that crash came to a screeching halt and turned around exactly at the green support curve, one of those amazing performances by a Midas support curve.
• The accelerated uptrend that started in March 2009 looked like it was going to be a repeat of the one that ran from 2002 to 2007, so I fit a TopFinder, TF3, to the pullback of Sept. 2010, as well as starting the S2 of that uptrend, the second thin green curve, from the same date. However, the latest two price bars of this chart have clearly broken below S2, showing that this accelerated uptrend has ended.
Where do we go from here? The only firm conclusion we can make is that we’re not having a strong uptrend up to the 2000 high. It is possible that after this pullback of the last two quarters an uptrend could start. But clearly, we’re in a different mode now from the two big cycles that started in 2000.
Looking at this chart from the mid 1990s to the present, we see that in March 2009 we had a lower low, and in June 2011 a lower high; these two facts are an indication that the long term trend has turned down.
Overall, though, the most remarkable feature of this chart since the 1990s is the cycling – absolutely enormous price moves up and down, -50% and +100%, several times. We’re in a huge trading range defined at the top by the peak in 2000 and at the bottom by the S curve launched from mid 1982.
Since price is cycling, oscillators are appropriate to employ. My two favorite are the RSI (top pane) and the MACD (bottom pane). Quite remarkably, both are showing strong negative divergences as indicated by the downward slopes of those two red lines. These are implying future downward price movement, consistent with the fact that we’ve experienced a lower low and a lower high.
My conclusion: We’ve been in a huge cycling range for the last 12 years. The current indications are somewhat negative for the breakout from this range. If that does happen, it would be dire indeed for both the market and the economy as a whole, since that would put the S&P below 700. I think that, even before we got that low, the Federal Reserve would step in with a new round of quantitative easing, QE3, which would reverse the market’s decline and set us off on a major new uptrend.