Head and Shoulders Top? S&P 500 to Consolidate and find Lower Trading Range

S&P 500 Market Top?


The U.S Stock Market as represented by the S&P 500 has made a good run, from S&P 500 level of 666 to 1219.80 for a strong rally.

However, based on the Chart Annotation above, the S&P 500 may have hit a Head and Shoulders Top, a Technical Pattern (analyzing patterns based on stock chart patterns) that suggests that a Top has been made and a downtrend could ensue.

Consolidation Pattern then Breakdown or Breakout?



Longer Term, the S&P 500 market may re-test the Previous low of 666, or a more likely situation, the S&P 500 market will start to consolidate into a sideways Symmetrical Triangle Pattern as shown in the chart above.

In the Symmetrical Triangle Pattern, the Stock or Market trades in the triangle, until it reaches closer to the end of the triangle, and then the market may break upwards, or downwards.

The Market does look like it may be going lower and find a lower trading range for now.

S&P 500 Stock Chart Today

US Stock Market and S&P 500 near short term resistance

This blog previously posted a breakdown scenario, and pointed out potential resistance areas.

Right now, the S&P 500 has support at 1270, and resistance at around the 1330-1340 level (based on 50% retracement, as well as other resistance levels). The market, currently at 1329 on the S&P 500, is also very near the 50 day moving average, which is currently at 1345.

If the S&P 500 tests resistance and fails, we could potentially re-test 1270 on the downside, and possibly breakdown some more, as we speculated.

However, if the market can sustain some strong days and have good follow through, breaking through the 1330-1340 levels, and break through the 50 day moving average, we have a chance for a good rally.

But the trend would still be down (based on the S&P 500 remaining below the 200 day moving average) and I don't think there is enough strength to break above the 200 day moving average right now.

Here are two Previous Charts on Resistance Levels (2 weeks ago):





Today's Chart

Historical S&P 500 Annual Return and Trading Range 1950-2007 and Volatility Ahead

From 1950 to 2007, the S&P 500 (500 of the Largest and most influential US companies) returned 9.2% annually (excluding dividends).

However, the 9.2% gain was not achieved by the S&P 500 going up in a straight line.

On any given year, from 1950 to 2007, the S&P 500 had an annual average trading range of 24.26%. This means that on average, from a year to year basis, the range from the lowest to the highest S&P 500 index value has a range of 24.26%.

The least volatile year during this period was around 10%. The most volatile, around 49%.

The Future

Over the last four years, the annual trading range was 14.1% (2004), 11.75% (2005), 16.75% (2006), and 14.97% (2007). For the last four years, the volatility has been very much under average.

Over the next several years, we expect this volatility to increase after four years of below average volatility.

S&P 500 Historical Annual Returns and Annual Trading Range
Research by: techfarm.blogspot.com

Year	S&P 500 Start	Return	Annual Low	Annual High	Trading Range
1950	16.66	22.63%	0.00%	22.63%	22.63%
1951	20.77	14.44%	-0.39%	14.83%	15.21%
1952	23.8	11.64%	-2.98%	11.72%	14.71%
1953	26.54	-6.52%	-14.43%	0.45%	14.88%
1954	24.95	44.21%	-0.60%	44.21%	44.81%
1955	36.75	23.76%	-5.90%	26.29%	32.19%
1956	45.16	3.34%	-4.54%	9.92%	14.46%
1957	46.2	-13.44%	-15.63%	6.34%	21.97%
1958	39.99	38.06%	0.00%	38.06%	38.06%
1959	55.44	8.03%	-3.35%	9.51%	12.86%
1960	59.91	-3.00%	-12.87%	0.80%	13.67%
1961	57.57	24.28%	0.00%	26.18%	26.18%
1962	70.96	-11.08%	-27.64%	1.41%	29.04%
1963	62.69	19.67%	-0.59%	20.21%	20.80%
1964	75.43	12.36%	-0.81%	15.07%	15.88%
1965	84.23	9.74%	-4.16%	10.77%	14.92%
1966	92.18	-12.86%	-21.59%	2.76%	24.34%
1967	80.38	20.02%	-1.18%	22.31%	23.49%
1968	96.11	<8.06%	-9.76%	13.80%	23.56%
1969	103.93	-11.42%	-15.29%	2.70%	17.99%
1970	93	-0.91%	-26.23%	1.34%	27.57%
1971	91.15	12.00%	-1.99%	15.85%	17.84%
1972	101.67	16.11%	-0.79%	17.82%	18.61%
1973	119.1	-18.09%	-23.55%	2.22%	25.77%
1974	97.68	-29.81%	-37.59%	3.45%	41.04%
1975	70.23	28.42%	-2.25%	37.52%	39.77%
1976	90.9	18.22%	-1.20%	19.60%	20.80%
1977	107	-11.12%	-15.88%	0.91%	16.79%
1978	93.82	2.44%	-7.86%	15.17%	23.02%
1979	96.73	11.59%	-1.56%	15.95%	17.51%
1980	105.76	28.37%	-10.90%	34.23%	45.13%
1981	136.34	-10.11%	-19.18%	2.92%	22.10%
1982	122.74	14.58%	-16.73%	17.61%	34.35%
1983	138.34	19.22%	-0.19%	24.80%	24.99%
1984	164.04	1.95%	-10.23%	3.88%	14.11%
1985	165.37	27.76%	-1.22%	28.85%	30.07%
1986	209.59	15.54%	-3.34%	21.60%	24.94%
1987	246.45	0.26%	-12.17%	37.10%	49.27%
1988	255.94	8.51%	-6.16%	10.94%	17.11%
1989	275.31	28.36%	-0.54%	30.92%	31.47%
1990	359.69	-8.19%	-18.12%	2.81%	20.93%
1991	326.45	27.77%	-5.24%	28.14%	33.38%
1992	417.26	4.42%	-5.96%	6.08%	12.04%
1993	435.38	7.14%	-1.95%	8.25%	10.20%
1994	465.44	-0.92%	-6.36%	3.74%	10.10%
1995	459.11	34.16%	-0.42%	35.67%	36.09%
1996	620.73	19.33%	-3.78%	22.78%	26.55%
1997	737.01	31.67%	-1.01%	33.82%	34.83%
1998	975.04	26.07%	-6.38%	27.68%	34.06%
1999	1228.1	19.64%	-1.84%	19.95%	21.79%
2000	1455.22	-9.27%	-13.82%	6.71%	20.53%
2001	1283.27	-10.53%	-26.38%	7.80%	34.18%
2002	1154.67	-23.80%	-33.43%	1.93%	35.36%
2003	909.03	22.32%	-13.22%	22.39%	35.60%
2004	1108.48	9.33%	-4.31%	9.82%	14.13%
2005	1188.05	5.07%	-4.37%	7.39%	11.75%
2006	1268.8	11.78%	-3.90%	12.85%	16.75%
2007	1416.6	3.65%	-3.71%	11.26%	14.97%

Average S&P 500 Annual Return (1950-2007) (excluding dividends): 9.22%

Average Annual Trading Range 24.26%
Trading Range Low 10.10%
Trading Range High 49.27%

S&P 500 PE Ratio, Dividend Yield, Total Annual Return (includes dividends)

Stock Market Performance During Recessions

Common Wisdom often suggests that the US Stock Market indices go down during a US recession. How true is this?

According to National Bureau of Economic Research (NBER), there have been nine Recessions (*) from 1950 to 2007.



The S&P 500 Stock Market return during these nine recessions has averaged -0.4% with a low of -22.9% (1973 to 1975) to a high of +16.4% (1953 to 1954).

If we look at the return of the S&P 500 six months before the Start of the Recession to the Peak, the S&P 500 during this period returned an average of -3.7%.

If we look at the return of the S&P 500 six months before the Start of the Recession to the Trough, the S&P 500 during this period returned an average of -4.1%.

Any Positives?

The S&P 500 during US Economic Recession from 1950 to 2007 has been mildly flat to down, confirming common wisdom. However, we can take some positives from the data.

The average ratio between the length of time of an Expansion to the length of time of a Contraction, is 6.7. This means that for every month the US market contracts, (during this particular 1950 to 2007 period) the US market expands 6.7 months.

The S&P 500 return from Previous Trough to Current Trough (8 entries from 1950 to 2007) averages a whopping 80%. If we annualize this per year, the stock market S&P 500 returned 11.7% during expansion phase from 1950 to 2007.

(*) Definition of Recession According to NBER

According to NBER:

The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. For more information, see the latest announcement on how the NBER's Business Cycle Dating Committee chooses turning points in the Economy and its latest memo, dated 07/17/03.

Other Views of Stock Market Returns during US Recession

New York Sun Article.

MarketWatch's Mark Hulbert Article.

BestWayToInvest Article

S&P 500 Index Values used in Research

The NBER Cycle link only provides the month start and end of a Recession. S&P 500 prices were sampled at the first day of the month mentioned by NBER.

The Nasdaq still has room to run (Stock Chart, July 12, 2007)

The US market rallied today, with the S&P gaining 28.94 points (1.91%) and the Nasdaq rallied 49.94 points (1.88%). The S&P 500 is now at all time highs, and the Nasdaq has reached a multiyear high (still below the Bubble highs from 2000).

Looking at the chart, the different indices have broken out, with Nasdaq performing very well.

In the main window, we have the three year performance of the Nasdaq ($COMPQ). In the top window, we have the ratio between the Nasdaq Index (currently at 2701.73) and the S&P 500 index (currently 1547.70). When the $COMPQ:$SPX ratio is high, that means that the Nasdaq is outperforming. When the $COMPQ:$SPX is low, that means the Nasdaq is underperforming.

This number is best used as a contrarian indicator. When the Nasdaq has outperformed too much, then the Nasdaq is at a top. When the Nasdaq has underperformed too much, then the Nasdaq is at a bottom.

In the last three years, the best time to buy the $COMPQ is when the ratio between Nasdaq and S&P 500 is around 1.65. The best time to sell, according to the charts, would be when the Nasdaq to S&P 500 ratio goes above 1.8. These ranges nicely coincide with the tops and bottoms.

Looking at todays situation, we see that the Nasdaq has broken out to new multiyear highs, and that the Nasdaq is outperforming the S&P 500. Trends tend to continue (what was resistance before is now support), and the ratio between the Nasdaq and S&P 500 is only 1.75. According to all this, there's still room to run!

If you invest in ETFs, the QLD (double the Nasdaq 100 ETF) might be a possibility. Also, since the Nasdaq is outperforming the S&P 500, Nasdaq stocks and tech stocks might be good upside plays.

Today's Chart

Follow today's chart of the Nasdaq using, courtesy of stockcharts.com:
Nasdaq Three Year Chart

Stock Market Concern: S&P 500 at risk?

Currently, the S&P 500 (using index $SPX) has traded the last few days underneath the 50 day moving average, which is bearish. However, it has not gone below support of around 1488. Just by looking at these two levels, the S&P 500 could trade between resistance and support.

However, there are some things to be concerned about.

• As the S&P 500 hit both recent tops, the number of S&P 500 stocks that are above their 50 day moving average has decreased. Currently, only 40% of the stocks are above the 50 day moving average. All of these are not good signs. (In a later post, we can discuss in more detail using the $SPXA50R as a contrarian indicator. If the $SPXA50R goes too low, that might be a bottom). In the chart above, the $SPXA50R is listed in upper window.
  
• Williams ADX is a technical indicator to evaluate the strength of the current trend. In the chart above, the Williams ADX is in the lower window. The Black ADX line says whether the stock is trending or not. Readings below 20 mean there is a weak trend, and ADX above 40 is a strong trend. In the case above, the ADX line is rising up from under 20 and is moving above 20, suggesting a strengthening trend.
  
• Using William's ADX, when the Red -DI line goes above the Green +DI line, that is generally a sell signal. Of course, this line should not be used by itself. There are many systems which use the +DI/-DI crossover, and many try to keep the trader from getting whipsawed in and out of an index or stock. The crossover often is used in conjunction with the ADX line. In the chart above, we do see the -DI line going above the +DI line, and the ADX line looks to be rising to the 20 level, which suggests a bearish trend may be strengthening.
  

In conclusion, the S&P 500 is stuck between the 1488 level and resistance is the 50 day moving average. Trading underneath the 50 day moving average for several days is negative in itself. While the $SPX has not breached the resistance level with good volume, there are still different concerns with the market based on the negative divergence using Stocks Over the 50 Day Moving average, and Williams ADX.

If the levels don't hold, then maybe the predicted ABC correction may still occur.

Current Chart Update

To look at the chart on a day to day basis, use this link.

Prediction Correct: S&P 500 bounces then re-tests lows.

Here is the Prediction of the S&P 500 Bounce and Re-Test of Lows on June 8, 2007:



Now here is the actual behavior of the market during this period:




The prediction looks to be correct. Right now, the market is re-testing the lows. It is finding support in the area between the previous lows and the 50 day moving average. We have to wait and see if the support area holds, or else we will get some variation of this ABC Correction Prediction.

S&P 500 Target Estimate based on Ten Year Bond Yield

I recently read an interesting article by Frederic Ruffy of optionetics.com . One of the interesting parts of the article is a way to estimate the S&P 500 based on the yield of the ten year bond. Full Article Here

Currently, the Ten Year Yield (based on $TNX ) is approximately 5.137%. On an S&P 500 Earnings basis as Reported (estimates top down) as of 6/4/2007:

2006 Estimate: 81.51
2007 Estimates: 88.74
2008 Estimates: 96.40

With the formula:
S&P 500 Estimate = [1/(Ten Year Yield)] * (S&P 500 Earnings)

2006 S&P Target = [1/(.05137)] * 81.51 = 1586.7
2007 S&P Target = [1/(.05137)] * 88.74 = 1727.5
2008 S&P Target = [1/(.05137)] * 96.40 = 1876.6

With the current S&P 1509.12, is the 2006 S&P 500 5% undervalued?

And if we look at the 2007 estimate, the S&P 500 is 14.4% undervalued, and based on 2008 estimates, the S&P 500 is 24% undervalued.

Are these target prices reasonable?

Short Term S&P 500 Bounce and Re-Test (06/08/2007)

From a short term perspective, the S&P 500 should continue to bounce to the 50% (1514) or 61% (1520) retracement levels and then retest the 50 day moving average lows. This 50 day moving average (speculation) may not hold.

The tools at StockCharts.com were used.

Prediction: ABC Correction on S&P 500 (6/7/07)

Prediction: Current S&P 500 Market will Correct and undergo an ABC Correction. Current resistance is the 50 day moving average at 1487. But based on market behavior, this resistance might not hold. There is a lot of buying volume between 1430 and 1460, and those who bought during that time might get worried and start taking profits now or on any rally.

The 50 day moving average should get taken out, and maybe hesitate at the 38.2% retracement price of 1477. However, better support will probably be at around 1457-1460 since previous buyers used to be at that level. This is the A-wave.

Buyers at the 1460 bring the price up back to the 38.2% retracement price of 1477, the B wave.

Then we finally get the C wave, and go down all the way to the 61.8% retracement level at 1437-1440. Sellers will be exhausted, and there is previous buying interest at these levels and we near the bottom.

In addition, I'll be watching another indicator, the $SPXA50R, the percent of S&P 500 stocks that are ABOVE (chart annotation says below. The chart annotation is wrong) the 50 day moving average. Previous history has shown that when this amount goes below around 30%, we are near the bottom. We are not there yet.

I used the tools at StockCharts.com

The idea of using $SPXA50R is thanks to Matthew Frailey at www.breakpointtrades.com .