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.

What if S&P 500 Breaks Below 839? 60, 40 and 10 Year Chart View

Wednesday, November 12, 2008: The Stock Market as Represented by the S&P 500 Index went down 5.19% to close at 852.30.

Many people are concerned.

The most recent support area is 839.80 established on October 10, 2008. The S&P 500 could go down near this area and "test" support there.

The S&P 500 could successfully test and then bounce up.

Or, the S&P 500 could fail there, and go below 839.80.

Breaking below 839.80

If we break down below 839.80, the next major support was set on October 10, 2002, at 768.30. We could potentially reach there, and when we test, we could either bounce and form a very strong multi year double bottom (bullish), or we could break and fall much further down.



The Ten Year Chart Above shows the current S&P 500 value and the 6 year support of 768.30.

40 Year and 60 Year View



If we look at the longer term view, we notice that longer 40 year trend line from 1974 to 2008, shows that current support is around 800 on the S&P 500. The 40 Year Trend Line started around the major bottom of the great bear market of the early 1970s and continues today.

If we look at the 60 year chart since 1955, we notice a much lower support level of 400 on the S&P 500.

Watch the Tests

Let us observe how the stock market behaves at each major test point.

Today's Long Chart

Decade Chart

Where's S&P 500 Support after Today's Big Drop? What should we do?

New Trading Range

Today, the stock market as represented by the Dow Jones Industrial Average dropped over 500 points for a loss of 4.41%. The S&P 500 dropped 59 points to 1192 for a 4.71% loss.

This drop was not unexpected. Around July of 2008, the S&P 500 hit a new low of 1200. Often, these lows are re-tested, and this is what we had today. We re-tested the lows and broke below previous support level.

We expect the S&P 500 to find a lower trading range.

Based on previous analysis, there's a good chance that the S&P 500 bottom could be between 1077, to 1172, a potential 10% drop from here.

Re-Evaluate Portfolio and Goals

So what should we do now? Over the long term, the stock market is the best place to be. However, this involves risk.

Have you looked at your goals and your portfolio and re-evaluated where you are? Do you need the money within the next five years? Do you have many decades to weather the storm? Do you have credit card debt? Do you have too much risk in your Discretionary Portfolio (as opposed to your retirement portfolio)?

Possible Ideas

So your main focus should be to re-evaluate your portfolio and your goals and your current financial situation. This should be the basis of many of your actions.

Depending on your high level game plan, here are a few tools:

1. Readjust allocation: Maybe you might want to have more cash or bonds, and less exposure to equity.
   
2. Stock or Sector Rotation: Maybe you might want to rotate away from sectors which are bad and rotate to the safer consumer staple names such as Procter and Gamble (PG).
   
3. More Diversification: Maybe you are too concentrated in your portfolio? Maybe you should readjust your portfolio to have better diversification.
   
4. Move towards ETFs, and Index Funds: Are you sure you can still keep up with your stock portfolio? Maybe you should consider just investing in broad based index funds, or ETFs. Or, you could do a combination of both for the Core and Explore method.
   

Crude Oil and Natural Gas Chart, Support and Trendlines

The Chart above shows Crude oil support levels at $100 a barrel and $87.71 a barrel. The 50% and 61.8% retracement from the three year lows matches horizontal resistance, which is good validation.

The bottom chart shows the ratio of Crude Oil to Natural Gas. We see the trend line of this ratio. If the ratio of Crude Oil to Natural goes back to trendline (around 12:1), then that means either Crude Oil continues to drop or Natural Gas increases or a combination of both.

Today's Chart

S&P 500 Trendline, Support and Resistance after Big Drop Today

The S&P 500 ($SPX) went down 38.82 points (-2.94%) to close at 1283.15.

Next support levels are the important 1270 and 1219 levels. (See the horizontal blue lines in chart above). The stock market could bounce on these support levels, or else these support levels could break and then we find new support levels and resistance levels.

Looking at the three year trend line (the blue diagonal trend line), we notice that that from 2005-2008, the blue diagonal trend line was support, establishing a trend. However, in 2008, we notice that the S&P 500 broke down below this trend line and remains below the trendline.

In chart analysis (also known as technical analysis), the usual rule is that support levels which have been breached now become resistance.

So now, the long three year trend line is the upper resistance of the S&P 500.

Let us first see how the S&P 500 behaves at the 1270 level, the first support level.

Today's Stock Chart

S&P 500 Still in Trading Range

The S&P 500 still appears to be in a trading range with 1270 on the S&P as support, and currently, resistance at the 50 day moving average of 1338. The S&P 500 is currently at 1315.

If the S&P 500 breaks through the 50 day moving average with volume and with good follow through days, next resistance is around 1400.

But until then, the US market is in a trading range (just right below the 50 day moving average resistance).

Today's S&P 500 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

Are you a Bull or a Bear? Is this Stock Market Broken? Where's the Bottom?

The Battle Between the Bulls (those who think the stock market will go up) and the Bears (those who think the stock market will go down) continues.

Are you a Bull or a Bear?

The Bulls

On March 11, 2008, Investors Intelligence released their latest Bull Bear Ratio.

As of that date, there are 31.1% Bulls and 43.3% Bears. The Bull Percentage is very low (and even less than the Bear percentage) which suggests that we may have some sort of bottom. Many other metrics show that the stock market may be oversold.

In addition, the market as represented by the S&P 500 recently successfully re-tested the 1270 lows and may be poised for a double bottom reversal, if we breakout from current resistance.

Dean Reese, on the Trading Goddess Blog, makes an argument that the market is not broken based on rare relative strength levels (RSI) and the 38.2% Fibonacci Retracement off a five year trend.

The Bears

However, looking at the chart from many angles, the intermediate trend looks down.

The S&P 500 is still below both the 50 and 200 day moving averages.

While we appear to have a double bottom based on the bottoms on January 2008 and March 2008 at the 1270 level, we do not have a double bottom reversal just yet. We need to see strength first.

The S&P 500 also appears to be forming a possible inverted cup and handle bearish formation.

In addition, the three year (or more) uptrend appears to be over.

Looking from a non-technical perspective, there were nine recessions from 1950 to 2007, and the average length of the decline was around 10.3 months. If we use this average, and use the start of the decline as October 2007, then we estimate that the downturn will end around August 2008.

How deep will the S&P 500 fall?

Dean Reese in the same blog entry on the Trading Goddess Blog, claims we can have a tradable bounce based on the 38.2% Fibonacci Retracement Holding (S&P 500 is very near the 38.2% Fibonacci Retracement Levels based on a 5 year trend).

While 38.2% is a potential support area, the market could find support even lower.

I added more annotations and comments to Dean Reese's chart:


If we consider the 50% and 61.8% Fibonacci Retracements, they both coincide with other areas of support and appear to be valid areas of support.

In addition, if we look at the period from November 2003 to August 2006, we notice a lot of congestion (the box on the diagram). This suggest much stronger support in this area.

Investors and traders who started going long towards the end of 2006, did not have much time to get on board, and most likely have been shaken out. Those who were in the market from the end of 2003 to the end of 2006 are starting to get nervous.

But because of the congestion from November 2003 to August 2006, we can speculate that we can find a stronger bottom here, from around the 1070 level to the 1267 level. This happens to coincide with the 61.8% (1077) to 50% (1172) to 38.2% (1267) Fibonacci retracement area.

So yes, it is possible that we still have up to 17% downside on the S&P 500 (if 1070 is the estimated bottom).

Silver Lining?

But as with all recessions and bear markets, this too will end, and we could have a great investing opportunity sometime this year or next year.

Interesting Symmetry

I flipped over the annotated chart above. Compare the chart above and the chart below. Notice the amazing symmetry? And you know what happened from 2000-2002.

We will have a Volatile Meandering Trading Range Stock Market in 2008

Are you experiencing a wild roller coaster ride in the US Stock Market in 2008? It is not over yet.

Near the end of June 2008, the S&P 500 ($SPX) formed an intermediate bottom of around 1270. As expected (this blog wrote about the re-tracement), the S&P 500 had a 38.2% to 50% Fibonacci retracement rally to around 1400. The re-test of 1270 is currently expected.

At that point, the S&P 500 could pass or fail. If it fails, we could establish new 52 week lows and go down to 1220. Or, the S&P 500 could pass and bounce off support of 1270. Potentially, during a bottoming process, the S&P 500 could re-test 1270 several times.

Depending on how things go, the S&P 500 could break resistance at about 1400 to 1424 and form a new higher trading range.

Whether up or down, the market in 2008 is expected to be a meandering, trading range bound market, with a possibility of even more breakdowns below 1270 on the S&P 500.

Today's Chart

Time for a US Stock Market Bounce on the S&P 500?

The US stock market has been going down for a while and the stock market has broken down below previous strong support of 1363. Is it time for a bounce on the S&P 500?

The S&P 500 may be oversold right now, and the S&P 500 seems to have bounced at the new support level of 1326.

According to different stock market bottom indicators, the S&P 500 may be oversold right now.

1. Ratio of S&P 500 Stocks Above 200 Day Moving Average to Stocks Above 50 Moving Average: 2.21. [Start looking for bottom after this number spikes above 2.0]
   
2. S&P 500 Stocks Above 200 Day Moving Average: 19.04% [Start looking as percentage goes below 40%]
   
3. S&P 500 Stocks Above 50 Day Moving Average: 8.62% [Start looking as percentage goes below 20%]
   
4. 10 Day Moving Average of Put-Call Ratio: 1.17. [Start looking as number goes above 1.1]
   
5. S&P 500 High-Low Index: 0.95%. [Start looking as number spikes below 10%]
   

All signs seem to indicate an S&P 500 Bounce may be coming soon (possibly after some sort of gap down, high volume down day, then a massive rally, for a capitulation bottom).

However, the bounce doesn't necessarily mean that we are forming the intermediate term bottom. We may retrace our recent downturn, back up to 1411 (38.2% Fibonacci Retracement) to 1443 (50% Fibonacci Retracement).



We may eventually re-test the S&P 500 lows, and possibly breakdown even more.

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

S&P 500 To Remain in Trading Range? (August 7, 2007)

We've had quite some volatility recently. The Bollinger Band width of the S&P 500 ($SPX) is at a very high 156! I don't expect this kind of volatility to sustain itself. I estimate that the Bollinger Band Width will decrease, and the overall volatility will decrease for a while.

This means that the $SPX will most likely end up in a trading range, giving the market time to consolidate. On the low end, we can set 1427 as the support. On the upper end, we can set resistance to around 1492. This coincides with multiple attempts of the $SPX to break through it. It also is the 50% re-tracement from the recent July 2007 correction. If we have a stronger rally, we may reach the 61.8% retracement of the July 2007 correction of 1507.

From there, we could either break resistance and breakout of the trading range, or break support, and breakout to the downside.

Today's Chart of S&P 500 ($SPX)

S&P 500 Chart Update after Big Drop Today (August 3, 2007)

On August 2, 2007, I said that the S&P 500 Index ($SPX) would bounce to at least 1484, a 38.2% retracement from the all time highs of 1556 on July 2007, to the recent bottom of 1440 late July 2007. However, the $SPX couldn't even bounce to the 38.2% retracement level. This is a sign of a very weak market.

I also said that after the bounce, the $SPX would re-test lows from 1437-1440, and we have to see how the $SPX behaves, whether it forms a double bottom, or break through support.

Today, August 3, 2007, the $SPX went down 2.66% to end at 1433.06. We have our answer: the $SPX fails the re-test of the lows. And support (1437-1440) is now overhead resistance.

Breaking the 1437 level is also not positive, since 1437 is a 61.8% retracement from the March 2007 lows of 1364 to the recent highs of 1556. I would have liked to see the 1437 line hold, but it didn't.

Next support areas are horizontal support at 1410, 1372 and 1362.

The $SPX is currently very oversold, with only 16.40% S&P 500 stocks above the 50 day moving average. Typically, numbers under 20% signals that we are near or at the bottom. Of course, oversold markets can remain irrational and continue to be more oversold. Next support level is 1410.

There are wild cards in the market. The Fed could cut rates, and impact the $SPX positively.

Also, there are sectors which are working better than others.

Perspective from 2 Year View


If we look at the 2 Year view, we can get a better perspective. We can set up a Fibonacci grid from the October 2005 lows to the July 2007 highs (Fibonacci means that certain numbers, such as 38.2%, 61.8%, and 50% occur very often in nature. And this can be applied to stock charts as well. This can aid in determining resistance and support levels). If we look at the 38.2% retracement, we find 1411, which coincides almost exactly to the 1410 level mentioned above when looking at the 6 month chart above. When we look at the 50% retracement, we find 1365, which coincides almost exactly to the 1362 level above when looking at the 6 month chart above. This is a good sign that the support resistance levels mentioned in the 6 month and 2 year charts are valid. (Valid means they are valid, but it doesn't mean that the support levels will always hold. Support levels can be breached, or stocks or indices could bounce at support levels).



Today's 6 month Chart of $SPX

Today's 2 year Chart of $SPX

Updates to $SPX resistance level for rally (Aug. 2, 2007)

The Wednesday, August 1, intraday reversal of $SPX after hitting a low of 1439 combined with very oversold conditions are some reasons why we might get a more sustained rally.

Based on Fibonacci retracements from the recent highs (1555) to the recent low of 1439, the rally might go up to either 38.2% retracement, 50% retracement, or 61.8% retracement which would be 1484, 1497, or 1511 if the rally is really powerful. 1497 seems like a reasonable resistance level in the $SPX.

As I mentioned earlier, I expect a re-test of the $SPX lows from around 1437-1440.

From there:
1. $SPX could bounce off support and form a good double bottom.
2. $SPX could break through support and start new leg down.

This is a partner piece to the previous chart analysis.

Today's Chart

Current Support Levels on S&P 500 (July 26, 2007)

The S&P 500 ($SPX) seems to be lining up perfectly with support and resistance. $SPX is now at 1482. There's resistance at around 1486. Support levels appears to be at 1464 (today, the $SPX nicely bounced off this support), and if it gets worse, we have the 200 day moving average at around 1447.

Don't be surprised if $SPX re-tests 1464 and decides which direction it really wants to take.

To look at the charts in another way, see this article on the $SPXA50R and $SPXA200R bottom technical indicators.

If we do break down below 1464, we may yet have a possible ABC Correction (mentioned in June 2007).

Stock Chart: NYX (NYSE-Euronext) Next Support Levels (June 21, 2007)

This site has been discussing the NYX stock (New York Stock Exchange-Euronext). Previous posts here (June 19, 2007) and here (June 6, 2007).

Now the chart above looks at the next support areas. I've determined the resistance based on previous horizontal resistance and my version of Fibonacci Estimates. I have confidence in the Fibonacci Grid I created above because the Fibonacci lines also coincides with other resistance areas.

So the next levels of support (Approximates) are $76, $72, and $70.

Stock Chart: DELL, Comeback Story, June 13, 2007

Dell (DELL) appears to be coming back. The stock has recently cleared a 2 year downtrend. The stock is currently above both its 50 and 200 day moving average, and recently, the 50 day moving average crossed above the 200 day moving average, a bullish sign.

It is approaching resistance at the $27.89 level, and most likely stronger resistance around the $30 level (you can see greater congestion and selling volume there).

If the stock can form a nice handle on low volume, this may setup a nice base off of a bullish cup and handle formation (December 2006 to Present), and the stock could breakout on good volume on its way up. This is the optimistic view. Of course, the stock could behave very differently at resistance levels, and the stock could fail and go beneath the 50 day moving average.

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.

NYX Stock in a Holding Pattern (June 6, 2007)

The New York Stock Exchange-Euronext Stock seems to be in a holding pattern. The multi year uptrend remains intact, but there has also been a 7 month downtrend, forming a symmetrical triangle. With this pattern, a stock normally trades within this triangle, and near the end, the stock may break out (up or down) on good volume. We can determine which way to trade/invest based on the direction of this breakout.

Currently, stock is stuck between support at around $79 and resistance at the 50 and 200 day moving average above. The stock is also being restrained by the symmetrical triangle described in the chart.

In the lower indicator window of the chart, there is a Bollinger Band Width indicator. Based on previous history, when the Bollinger Band Width is 5 or lower (on this stock), the stock normally has a large change in price (either up or down). Right now, Bollinger Band Width is around 6. So we are almost there.

Overall, NYX is in a holding pattern, but a big move to the upside or downside could be coming within the near to intermediate term future.