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.

Stock Market Major Triple Top: Big Drop Ahead? Target S&P 600.

The U.S. Stock Market as measured by the S&P 500 index is at 1429 (Monday, September 10, 2012), just 10% below the all time closing high of around 1565 on October 2007.

The S&P 500 is nearing very strong overhead resistance, and it couldn't surpass it in 2000 (top #1) and then again in 2007 (top #2) when it could not surpass the all time high of 1565.

What if S&P 500 Can't Break Resistance: Target: S&P Level of 600, a drop of 58% from here.

There is a very bearish technical pattern called the "Triple Top Reversal" 

The pattern is more than establishing three peaks (and the stock market price not exceeding the last peak).  It also requires the stock pattern to reach the Confirmation Line (currently around S&P 700), which marks the previous valleys in the Triple Top pattern.  Some websites and books say the average decline from a triple top reversal pattern is around 15-20% below the Confirmation Line.

But since the time between Major peaks is more than 6 months (many years in the diagram above), the average drop is less reliable, but the pattern does mark a Major Market top.

It is possible if this scenario takes place, this could mean that the market could suffer many more years of difficulty (with stock market crashes and violent rallies).

The Fundamentals and Demographics support this theory:

All around the world, there is a global debt crisis, with countries planning to default on their debt.  The United States now has $16 Trillion in National Debt, which is more than 100% of GDP (Gross Domestic Product), and currently, there is no sign that the U.S. can control their finances, spending, and revenue.  This number also does not include $62 Trillion in Unfunded Liabilities or Promises to pay (which includes Social Security and Medicare).

The large Baby Boomer demographic is retiring and they will be selling their assets, and also, they will be claiming benefits such as Social Security, Medicaid and Medicare.  The younger generations are supposed to help pick up the slack, but there is not enough to do that, and there is high unemployment among the young adults, and many people are riddled with high debt, underwater mortgages, and ever increasing college tuition.

The Bond rating Agencies, in 2011, for the first time ever, downgraded the U.S. Creditworthiness.

Based on all this (and more), the U.S. Market might be headed towards another lost decade (2000 to 2020)?

Stock Market S&P 500 Long Term Bottom Target: 450 to 600, a Drop of 25% to 44% from Here

Previously, we offered analysis that the US Stock Market could be in trouble if the S&P 500 goes below 768.

The S&P 500 recently went to an intraday level of 741 but successfully tested the major low of 768 set 6 years ago on October 10, 2002.

It is still very possible that the S&P 500 could re-test (at least once) 741/768, and the S&P 500 could break below this level.

At this point, where would a potential long term bottom be?

In the Dire Consequences if S&P 500 goes below 768 post, we hinted that a long term bottom might be reached around the S&P 500 level of around 500.

The Long Term bottom could be around 450 to 600 on the S&P 500 over the next several years, a drop of around 25% to 44% from here (S&P 500 Level of 800).


A. No Major Support Until Around S&P 500 level of 450 to 500.



From the chart, aside from seeing the major support area of 768, we also notice that from 1995, the slope of the Chart increases to an unsupportable level, ending up in the Bubble of 2000. The Stock Market had no time to rest from 1995 to 2000, and there was no time to consolidate. This lack of stock market consolidation does not provide any good support for the market as it falls below the 768 level on the S&P 500. This could potentially mean a large drop (over years?) if the S&P 500 drops below 768.

The S&P 500 Level in late 1994 right before the S&P 500 rocketed upwards at an unsustainable rate is around 450.

This sets up the lower end of the long term bottom range of 450 to 500 on the S&P 500.

B. Reverting Back to 60 Year Trend Line Suggests Level around 400-500



Looking at the 60 Year Chart of the S&P 500, we notice the 60 Year Trend Line hits the S&P 500 level of around 400 at this time. If we look forward over time, this trend line would approach 450 to 500, which coincides with the predicted long term support level above.

C. Five Month Fibonacci Grid Suggests Bottom of 600



When we look at the five month chart, we place a Fibonacci Grid and align the top to a recent high (of around 1265), and align the 61.8% and 38.2% line to coincide with the recent trading range between 850 and 1010. The lower range of the Fibonacci Grid suggests a potential bottom.

This S&P 500 level is 600, setting the upper range of a longer term S&P 500 Bottom.

D. 60 Year Fibonacci Retracement: 50% = 770; 38.2% = 588

Early in 1950, the S&P 500 was around 17. At the top of the market, the S&P 500 reached around 1560.

If we use the Fibonacci Retracement Rule of 50%, that would lead to the S&P 500 Retracement of 770, which coincides with the recent major bottom of 768 that was achieved October 10, 2002, and very recently.

If we use the Fibonacci Retracement Rule of 38.2%, that would lead to the S&P 500 Retracement of 588, which is within the 450-600 range using previous methods of analysis.

E. Chartist Louise Yamada Opinion: 400 to 600

On a recent CNBC Fast Money episode, Chartists Louise Yamada predicted an S&P 500 bottom of 400 to 600. This coincides with the analysis so far.

F. Secular Bear Market, Cyclical Bull Market

Television Personal Financial Advisor Suze Orman predicted in 2004 that in 2000, we started a Secular Bear Market (long term Bear Market of around fifteen years), and around 2003, we started a cyclical Bull market (short term market lasting around two to four years), that would eventually end, and hit near the lows of 2002.

Her prediction was accurate.

If her prediction continues, we will continue the Bear Market until around the year 2015 or so.

G. Major Demographic Shift Ahead

In 2010, there will be a major demographic shift as the first Baby Boomers reach 65 years of age, and may retire and take more money out of the stock market. More Baby Boomers will do the same in the years following 2010.

This may put pressure on the U.S. stock market and may be in line with the long term Secular Bear Market theory starting in 2000 and ending around 2015.

Five Month S&P 500 Stock Chart

Sixteen Year S&P 500 Chart