Trading the Largest 16 Year Stock Market Trading Range: Major Market Top or Breakout

The U.S. Stock Market as represented by the S&P 500 Index is in a major 16 Year Trading Range from 1997 to 2012.

The Low of the trading range is around 666, which was reached January 2009.  The S&P 500 last reached that level around the 1996-1997 timeframe.

The High of the Trading Range reached a level of 1576 on October 2007.

The S&P 500 is currently trading at 1444, around 9% below the all time highs.

There is Major Stock Market Resistance around the 1550-1576 level.

One Trading Range Strategy could be:
1. Take Profits or Sell the S&P 500 between here and the 1550 to 1576 level.

2. If the S&P 500 has a solid breakout past 1576 with confirmation, Buy the S&P 500 with a Stop Near Support (around 1576).

3. If the S&P 500 reaches near the bottom of the trading range channel (a drop of 54% from here (1444)), Buy the S&P 500 (or cover the S&P 500 Short Position)

4. If the S&P 500 breaks down below the bottom of the trading range channel (below 666) with confirmation, Sell the S&P 500, with a Stop Near Resistance (666).

So even if the S&P 500 stays within the Large Trading Channel, that could still mean very large drops (or rallies) in the Stock Market as represented by the S&P 500.

Stock Market (S&P 500) Breakdown to New Levels Has Begun

For the last three to four months, the Stock Market, as represented by the S&P 500 has been trading in a symmetrical triangle pattern. This blog has been saying that breakout would occur soon, sometime during February.

On Tuesday, February 17, 2009, the S&P 500 has finally broken down from the symmetrical triangle and is starting a new downtrend.



There is major resistance at around the 740 to 760 level from the November 2008 lows of 741, and the major low of 768 during the last Bear Market from 2000 - 2002.



While the stock market could bounce off these lows again, based on the breakout from the symmetrical triangle pattern, we could hit a low of 558 on the S&P 500. [Since the maximum range of the previous triangle is 267 (1007 - 740 = 267), we apply this to the breakout point of 825 to come up with a downside target of 558 (825 - 267 = 558)]

This matches this blog's analysis of a S&P 500 bottom of 450 to 600.

Notice that if we break down below the major S&P 500 bottom of 740 to 768 on the S&P 500 set in 2002 and 2008, there is not much support below:



We do appear to be in the middle of a long term secular bear market that started in 2000 and will end around 2016.

Today's Chart of S&P 500

Stocks (S&P 500) Converging and is Breakout Near? Usually a Continuation Pattern (More Downside Ahead?)

U.S. Stocks, as represented by the S&P 500, are converging towards a certain price, forming a wedge or symmetrical triangle pattern.



Chartists and technicians often say that near the end of the triangle or wedge, a breakout could occur with good volume. While the breakout could occur in either direction (up or down), the pattern is often a continuation pattern of the previous trend:

"While there are instances when symmetrical triangles mark important trend reversals, they more often mark a continuation of the current trend. Regardless of the nature of the pattern, continuation or reversal, the direction of the next major move can only be determined after a valid breakout." (stockcharts.com)

Since the previous pattern had been down, this means that the continuation pattern would mean further downside.

Following stockcharts.com recommendation of estimating the strength of the move, we can take the widest part of the symmetrical triangle (approximately from $SPX level 1010 to 740 or so, for a depth of 270 S&P 500 points), and then apply this at the breakout level.

If the breakout occurs near 870, that means that the move could extend down 870 - 270 for a target of S&P 500 600. This lower target of S&P 500 value of 600 matches previous lower target analysis of a bottom of 450 to 600.

But as many sites warn, while the wedge or symmetrical triangle pattern is usually a continuation pattern, it could also be a reversal pattern, so let us observe the breakout and the validity of the move according to stockcharts.com.



Today's Stock Chart

Stock Market Breakdown from Symmetrical Triangle?

In our last blog entry, the S&P 500 appeared to be in a Wedge/Symmetrical Triangle.

However, as with most patterns, we need confirmation (strong breakout with high volume above upper trend line), and the (ongoing) pattern did not turn out to be a bullish one.

However, if we generically call the pattern a symmetrical triangle, the interpretation would be a triangle, that could break either way (up or down). This pattern will require confirmation as well, with a breakout above the upper trend line, or a breakdown below the lower trend line, with volume.

Let us see how much volume there will be in the possible breakdown this morning (Futures are down very big before the market opens).

Today's S&P 500 Stock Chart

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

Possible Stock Market Breakdown Scenario on S&P 500

In the chart of the S&P 500, we notice that the patterns from November 2007 to December 2007 compared with the pattern from January 2008 to March 2008 are very similar. If the pattern holds, we can expect a further breakdown below 1270 on the S&P 500.

While not a guarantee, the S&P 500 could be forming a bearish formation, the inverted cup and handle pattern. The Drop to 1270 on January 2008 is the first part of the cup. The recent decline to 1282 could be part of the other side of the cup. If the pattern forms, we may see some sort of a handle, then eventually, a breakdown below 1270.

Again, this is only a potential scenario and not a guarantee that we will get a breakdown on the S&P 500.

Today's Chart with Info Above

The US Stock Market (S&P 500) has Broken Down. Where is Support and Bottom?

Today, January 17, 2008, the US Stock Market as represented by the S&P 500 Index has broken down and broke a long term and important support level of 1363.98. On March 2008, the bottom of 1363.98 held. On August 2008, the bottom of 1370.60 held. Then on Thursday, January 17, 2008, the S&P 500 ($SPX) tested the bottom of 1363.98, and solidly broke below that level, closing at 1333.25. This is not good for the market.



Next Support Levels

Next major support levels are 1327, 1246 and 1219 on the S&P 500 ($SPX).

New Bottom Indicator: Ratio of Stocks Above 200 Day Moving Average to Stocks Above 50 Day Moving Average

Previously, we looked at several stock market bottom indicators such as the stocks above the 50 and 200 day moving average (low percentage means we are close to bottom).

We use this information to come up with another Stock Market Bottom Indicator. We take the ratio of Stocks Above the 200 Day Moving Average to the Stocks Above 50 Day Moving Average. When this ratio spikes above 2, the market is often near or at a bottom. Another way to look at this, is as the Stocks above the 50 Day Moving Average goes down very low in relation to the Stocks above the 200 day Moving Average, the stock market has been oversold and we start to form a bottom.

Currently, the $SPXA200R to $SPXA50R Ratio is at 1.83, and we are getting closer, but we are not there yet.

Other Oversold and Bottom Indicators

1. Overbought, Oversold, and Oscillators
   
2. Stocks Above 50 and 200 Day Moving Average
   
3. Put-Call Ratio
   
4. New High-Low Index

Current Stock Chart With Information Above