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A Major Market Meltdown or Melt up?

Two indexes and one important technical indicator are converging toward a critical juncture. The outcomes of this convergence can help decide the next major stock market trend.


Many investors track various indexes and technical indicators for clues to changes in directional market trends. The S&P 500 Index (SPX) remains one of the most popular and widely followed market indexes. It is a market-cap weighted index comprising the biggest market-cap weighted names.

Another broad market index, less recognized but of equal significance to SPX, is the NYSE Composite Index (NYA). The index consists of all common stocks listed on the New York Stock Exchange, including ADRS issued by foreign companies, REITs, and tracking stocks. NYA does not include closed-end funds, ETFs, limited partnerships, and derivatives.


NYA consists of over 2,400 companies and reflects the performance of all listed stocks on the New York Stock Exchange. The index is a free-float market capitalization based on price and total return, including dividends. Many believe this broad-based index is also an excellent proxy for the global stock market since one-third of the total market capitalization comprises large international companies.


A ratio analysis between SPX and NYA is nearing one of the highest levels in the past twenty years. The last time this ratio peaked was during the beginning of 2000, ahead of the Tech/Telecom dot.com bubble. It is uncanny that this technical indicator has accurately called the previous stock market top and the ensuing two-year bear market.


Nearly twenty-plus years ago, a complex head and shoulders top appeared in the SPX/NYA chart during 2000-2022, coinciding with the Tech/Telecom dot.com bubble. A death cross-sell signal in Jun 2000, soon followed by a subsequent neckline breakdown in Sept 2000, confirmed the top in the stock market, leading to a 2-year bear market decline.

Fast forward to 2020, a well-established head and shoulders top pattern has developed. The pertinent question is whether the recent Nov 2021 downtrend breakout (Mar 2023) and subsequent rally to 0.27403 are real or a false breakout.


A convincing move above 0.27494-0.27691 or the left/right shoulders helps to negate the head/shoulders top, extending the rally toward Nov 2021 high (0.28840). A new high confirms a major breakout and the start of the next major bull rally (market melt up).


On the other hand, failure to surge above the left/right shoulders solidifies a right shoulder and warns of another decline to the 50-day (0.2590) and 200-day ma (0.2618). Neckline support remains at 0.24457-0.24515. A breakdown here confirms head/shoulders top and the start of a devastating bear decline (market meltdown).


In summary, history does not repeat itself, but it often rhymes. Although no two market environments are identical, they can repeat through similar historical patterns.


Is the 2020-present market environment, as evidenced by the head and shoulders top pattern, like the 2000-2002 Tech/Telecom dot.com market environment?


Or will a negation of the head shoulders top ends the cyclical bear decline and signal the resumption of May 2013 structural bull?


Source: Courtesy of StockCharts.com


Source: Courtesy of StockCharts.com

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