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.

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

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)

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

S&P 500 Returns by Day of Week 1962-2007

From 1962 to August 24, 2007, the S&P 500 returned different average daily returns based on the day of the week. The only negative day turns out to be Monday with a negative return of -0.044%. Wednesday turns out to be the largest percentage average daily gain at 0.087%.



From the same period, Tuesday seems to be the day with the largest average daily trading range with a range of 1.462%. Friday has the lowest average daily trading range of 1.407%.



The third chart shows relative volume. Since volume has increased greatly from 1962, we do not want to overweight the volume in the later decades. So to balance out volume, we use relative volume. We calculate relative volume by taking volume and dividing by the previous twelve months average volume.

The chart shows that Monday is the lowest volume day with 0.99 relative volume, and Wednesday is the largest relative volume day with a 1.12 factor.

Is the Correction Over? Possible Bull and Bear Scenario on S&P 500 (August 17, 2007)

What a week we've had! The stock market goes up and down many percent each day. On Thursday, August 16, 2007, the S&P 500 Index ($SPX) opened down near the expected intermediate bottom area of 1365 ($SPX bottomed at 1370). There was panic in the market. But towards the end of the day, the market had a massive rally to finish almost even.

Thursday appeared to be a capitulation ("I surrender!") bottom and the nice recovery helped solidify that. Friday continued the Fibonacci bounce to the 1440 (38.2%) to 1463 (50%) levels.

Fibonacci Theory says that the 38.2%, 50%, and 61.8% numbers occur all throughout nature, and also in stock charts. You can place a Fibonacci Grid (the five blue horizontal lines in the chart above) with all those numbers from a high to a low or from a low to high. Resistance and Support levels often occur at these levels. If other support and resistance levels, such as the moving average or horizontal or trend line resistance occurs at those areas, then the Fibonacci lines are valid.

During a market drop, after the market hits some sort of bottom, the market often bounces to one of the fibonacci levels. It should bounce to at least the 38.2% level (1441) which was already passed on Friday, August 17. If the bounce is strong, the stock or index could bounce to the 50% level (1463) or even 61.8% level (1485). Then, the stock or index would reverse after that retracement.

In the $SPX chart, there is also congestion around the 1463 level.

So from today onwards, I expect a bounce to reach somewhere around the 1463 level. Then, I expect $SPX to reverse.

V shaped market bottoms are not very stable. What often happens is that sometime later (possible a week or so after the first bottom is made), the stock or index would re-test the lows. In the chart above, I expect $SPX to re-test near the previous lows of 1370. But the $SPX could go down to 1365 or so and then recover, and still be a successful re-test.

Now at this point, there is no edge in determining whether the $SPX will break down and start a new lower trading range, or it will bounce off the previous lows and form some sort of a Bullish double bottom.

If it breaks below the previous lows on good volume, we could see a new lower trader range, the bearish case.

However, if the $SPX bounces off the previous lows, this is bullish. We tested the previous lows twice and succeeded, forming a bullish double bottom.

At this point, we don't necessarily go straight up. The $SPX will mostly take time to consolidate, and eventually settle around 1441 to 1485 trading range. This would be consistent with the congestion that occured earlier at those levels.

After sufficient time, (maybe in the November/December timeframe), the $SPX would break out from this trading range and start challenging the previous all-time highs as part of the seasonal 4th quarter rally.


Today's Chart

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)