Stock Market S&P 500 in Upper Range of 60 Year Mainstream Price Channel

The S&P 500 (US Stock Market) has been going down for sometime, and the S&P 500 went down 6.7% on August 8, 2011, to 1119.46. From the long term view, where is this market headed?

If we look at the S&P 500 chart from 1950 to 2010 (We made this chart the middle of 2010), we see that the S&P 500 Stock Market is now solidly within the mainstream price channel between the years 1950 and 2010. The peaks in 2000 and 2008 can be considered part of an unsustainable "Bubble" period.



Based on the charts, the current price channel (2011) appears to be somewhere between 500 and 1300 on the S&P 500. Over the long term, the trend still is up, but over many years, the S&P 500 might trade within this mainstream price channel for many years.

Stock Market To Stagnate for Years

In June 2010, we blogged about the US Stock Market stagnating for around five years within a Secular Bear Market. We still hold that view.

Lower Highs, Lower Lows, Violent Rallies in a Secular Bear Market

Since 2008, we appear to be making lower highs (around 1500 in 2008, and around 1370 on the S&P 500 in 2011), and maybe we'll be making lower lows.

If we are in a Secular Bear Market, this does not mean we will be going straight down in a straight line. There will be many tradeable and violent snapback rallies when we least expect it, but these will be Bull Markets within a Secular Bear Market.

Stock Market S&P 500 to Continue Large Drop If We Break Important Levels.

S&P 500 Level of 741 is a very important technical support level. It is the major bottom in late 2008. It is also very close to the major bottom of the great bear market which ended in 2002.



In the chart above, we notice the importance of the S&P 500 level of 740 to 760. We also notice that in 1995, the slope of the chart increases at an unsupportable rate. It was during this time, that the mantra "buy the dip" was used with great success.

However, starting in 2000, the Bubble burst going down to S&P 500 level of 768.

From 2002 to 2008, we had another Bubble (credit, housing bubble), and it burst again, and went all the way down to S&P 741.

This major support area of S&P 740 to 760 has to hold. If it doesn't, then there is not much support all the way down to S&P 500 level of around 500 (1995 levels). There is not much congestion between the the S&P 500 level of 500 to 740, and support will be hard to find.

This bottom of S&P 500 level of 500 is consistent with this blog's target of S&P 500 level of 450 to 600.

On Friday, February 27, the S&P 500 closed at 735, below the important level of 740 to 760. This may be a sign that we are continuing to head to the lower S&P 500 target. If the target is S&P 500 level of 500, that is another drop of around 47%.

60 Year View



Notice that in the 60 year view, the trend line shows a support level starting at around 400, and as time passes, the support level would increase. This is close to the lower S&P 500 target of 450 to 600.

So from 1995 to 2000, we had the "Buy the Dip" Mantra. Now, as we go back in time to 1995 S&P 500 levels, we will have the "Sell the Rally" strategy which should work in this market.

Today's Stock Chart

Have We Capitulated Yet in the Stock Market? We may break Records. Stock Chart Included.

The US Stock Market as represented by the S&P 500 index went down 78.5 points to 909.92 for a loss of about 7.9%.

We Are Near Record Levels

By almost any metric, we are extremely oversold and near historic levels.

Even before today's big drop, by many technical (related to looking at charts, and price and volume movements and other patterns) standards, we were in extreme oversold conditions.

We could also look at how overextended the S&P 500 Market is from the 52 Week High (and minimize the extension from the 52 Week Low), and we find that we are 42.30% below the 52 week high. In a previous study looking at the S&P 500 in relation to the 52 week high and low, from 1950 to March 2008, we are at the lowest levels since the great bottom of October 3, 1974 with the record of 44.11% HOLU value (mainly how overextended the market is from the 52 week high).

The previous study found that of the 59 trading days from 1950 to March 2008 with the HOLU value greater than 30%, the average one year forward annual return was a market beating 22.13%.


Stock Chart



Previously, we thought that the S&P 500 could hold at 1077, but if the stock market breaks this level, the Stock Market would truly be in trouble. This is the case today as the market sliced easily through 1077 and is now at 909 in a very short time.

We are nearing the congestion around the S&P 500 level 768 (the great bottom from 2002-2003 after the dot com bubble crash) to 936. We might have other support areas such as S&P 840, before we could reach the dot com crash bubble low of 768.63.

Perhaps we are headed towards a re-test of the dot-com crash bottom, and maybe we may form a bullish double bottom around 768.63.

Have we Capitulated and Surrendered Yet?

Common Wisdom States that Stock Market Bottoms often occur after we have Capitulation, where everyone gives up and surrenders on the market often with a crescendo massive sell off.

Today, you could really sense great concern. After visiting a bank, I heard someone say that it is official after looking at the business news program. I hear others talk about losing much of their money.

On common business programs on CNBC, shows such as Mad Money, and Fast Money, were replaced by world wide market news.

The word "crash" is heard all over the news programs. The word "Depression" and "Recession" is thrown around by many people.

The New York Times Internet Front Page talks about the "Markets in Europe and Asia Plunge" and "Nations weighing Global Approach as Chaos Spreads" and "Afternoon Turns Dark as Stocks Plunge."

Photos of traders in shock appear over all the newspapers.

News from around the world shows that many of the world markets are losing around 5% to 10% overnight.

Business programs keep talking about more problems in the future, hedge fund redemptions and record amount of mutual funds being sold as investors show real fear.

The Dow Jones Futures are down big, around 300 points.

There's a good chance that the market could open with a big gap down and continue to sell off. The Big Gap down is good, as this could often be an initial sign of capitulation.

Typically, massive buying comes in, shorts have to cover, and we establish an intermediate bottom and a tradable rally can continue.

But with all the problems all around the world, with all future redemptions still to come, and with traders not wanting to stay long before the weekend (October 10, 2008 is Friday), will we really have the capitulation bottom on Friday October 10, 2008?

But if one is truly a long term investor, this could be a great buying opportunity, or at least a good opportunity to continue accumulating index funds or ETFs for the long term.

Many times near market tops, we often hear that this time, it's different (to justify the market continuing to go up at a fast rate). We could apply this logic near market bottoms, where people proclaim, this time, it's different (to justify a much larger stock market fall).

One day, the stock market will stop falling. And for the patient, disciplined investor, now might be a good time to start or continuing accumulating.