Monster Stock Rally, Blowoff Top then Massive Stock Crash?

In the last post, this blog speculated that we are nearing a Major Market Top and will hit the third peak in a Triple Top, and we may see declines and stagnation for many years.

But what if, instead of a Triple Top Reversal, what if we break out of the previous highs on the S&P 500 (around 1550-1565 on the S&P 500 set in the year 2000 and 2007)?  Then, we will have a very bullish Triple Top Breakout.

We could even be experiencing an Ascending Triangle Formation.  At the end of the Ascending Triangle, stocks could breakout upwards, a bullish sign.

But can this really be sustained?  In previous blog entries, this blog mentioned that there are many headwinds from a National Debt out of control and now at over 100% of GDP, and the Baby Boomer Demographic Retiring. 

This could be part of a major Blowoff Top (like a Volcano) where the mother of all rallies, a massive major rally will be followed up by major stock market crashes and declines.

(The Run-up could be spurred by the Fed continuing to print money (with QE3, and other programs), and short covering rallies as people short near the S&P 500 all time high, and possibly an economy that looks to be improving despite all the headwinds in the market.)

Will we be following Japan's lead (Nikkei 225) if we follow this Blowoff Top Pattern?

Look at the massive runup in stock prices in the Nikkei 225 from 1985 to 1990, and then a multi-decade set of stock market declines and massive crashes.

The U.S. S&P 500 stock index is now (Thursday, September 13, 2012) at 1459.99, is only 7% from the all time high of 1565.

Possible Bullish Bottom Triangle Wedge Pattern on S&P 500 Stock Market?

Looking at the S&P 500 Stock Chart, we noticed that the S&P 500 ($SPX) may be within a bullish Bottom Triangle Wedge Pattern.

According to the Trending123 website, a Bottom Triangle/Wedge is a possible bullish reversal pattern.

"These patterns have two converging trend lines. The pattern will display two highs touching the upper trend line and two lows touching the lower trend line.

This pattern is confirmed when the price breaks upward out of the Triangle/Wedge formation to close above the upper trend line.

Volume is an important factor to consider. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when the breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about decisions based on this Triangle/Wedge."

As the website suggests, the reversal won't occur after a successful breakout with good volume above the upper trend line of the Triangle/Wedge Pattern.

As of Wednesday, October 22, 2008, we are at the bottom end of the triangle, and if the pattern holds, we may eventually get a breakout on the upside.

But as with all patterns, patterns are not guarantees and patterns can fail.

For more details of the Bottom Triangle Wedge Pattern, see the Trending123 Article on this.


Today's S&P 500 Stock Chart

Stock Chart: PFE, Pfizer (June 15, 2007)

PFE, Pfizer, appears to be in the middle of an ascending right triangle, a bullish formation. The stock does not have the strength to break upper resistance. However, as the stock goes lower, at each stage, buyers support the stock at higher levels, creating higher lows. As the stock trades closer to the end of the triangle, buying pressure may be so strong, that the stock could breakout possibly on good volume.

Many technical buyers would like to buy the breakout above the triangle, ideally when the breakout is accompanied by good volume.

However, some could argue that the patient investor (who cares more about fundamentals than technicals or charts) can invest within the triangle. The justification of this is that a stock like Pfizer (PFE) pays a good dividend yield (currently at 4.30%). While waiting for the stock to breakout, the patient investor can reinvest dividends at lower prices.

For a real life example of a breakout off an ascending triangle, see Hansen Natural (HANS) example right here.

Here's a current day stock chart of Pfizer with the aid of the tools at StockCharts.com .

Stock Chart: Hansen Natural (HANS) has Broken Out! (June 15, 2007)

Hansen Natural ( HANS ) has just broken out of an ascending triangle on Good Volume. This is bullish!

Previously, HANS had formed an ascending right triangle with the hypotenuse increasing in slope from left to right. Ascending Triangles have a bullish bias. The stock has no strength to break past resistance. However, as the stock tries to go lower, there are buyers who start supporting the stock at higher levels, creating higher lows. Soon, all this buying pressure gets stored in the tip of the triangle, and the only thing a stock can do is Breakout upwards with Good Volume.

This is what is happening to HANS right now, and HANS has a bullish bias.