When a cyclical bear end and the structural bull resumes, it is often because the prevailing long-term trend has regained control. Although it may sound overly simplistic, the dominant long-term trend offers insights into the structural trends.
The classic stock market pearl of wisdom, “the trend is your friend,” implies that an existing trend is likely to continue until it does not.
Predicting market bottoms and tops is challenging. Attempting to predict pivotal turns in market directions can also be tricky, even for the most astute and experienced traders.
The enclosed charts show the history of the SPX Index, painting the dominant and prevailing trends over the years and decades. Attention to the longer-term monthly and yearly trends can provide the best information to uncover the structural trends.
SPX Yearly Chart
It is rare for outside-year patterns to develop in the SPX Index. Over the past century, SPX has experienced only six (6) of these yearly reversal patterns. Four (4) were positive outside years (i.e., 1935, 1982, 2016, and 2020), and two (2) were negative outside years (i.e., 1937 and 1973).
It is also unusual to experience two (2) outside years (i.e., 2016 and 2020) within one structural bull/bear cycle (i.e., May 2013-present).
The ability of SPX to rebound from its 10-year ma (now at 2,924) and the middle trend line (blue dash line now at 2,511) during the Feb-Mar 2020 pandemic cyclical decline confirmed the continuation of the May 2013-present structural bull trend.
The SPX rally over the past few years has been explosive. The top of the 1920s uptrend channel currently trending up at 5,259 represents long-term resistance. SPX faded near the top of its long-term uptrend in Jan 2022 (4,818.62).
Does this imply SPX will transition toward a cyclical bear decline or a structural bear/trading range market?
Interestingly, the recent 6/17/22 low is 3,636.87 or near initial support at 3,623-3,760 (2020 high and 2021 low), and below this to 2,924 (10-year ma), 2,511 (internal blue trend line), 2,192 (2020 yearly low), and 1,576-1,699 (May 2013 structural breakout and the 30-year ma).
SPX Monthly Chart
Since the Oct 2007-Mar 2009 global financial crisis bear market bottom (666.79 - Mar 2009), the dominant long-term trend for SPX has and continues to be the 13-year structural bull between 2,853 (red dash line) and 5,175 (green dash line).
The middle of this structural uptrend channel (blue dash line - 3,730) may hold the keys to determining if the recent Jan-Jun 2022 decline of 24.52% is a cyclical bear decline within a prevailing structural bull trend.
With only two brief violations of the middle of the uptrend (i.e., Sept-Dec 2018 correction and the 2/19/20-3/23/20 pandemic-induced cyclical bear), the 6/17/22 low (3,636.87) may be another pivotal bottom if it holds this level on pullbacks this year.
Remember that this is another mid-term election year, and 4-year stock market lows tend to develop.
Despite the intra-month violations of the 10-mo and 30-mo moving averages at 4,305 and 3,916, respectively, it is constructive that SPX has managed to move above the crucial 30-mo ma. The ability to maintain above the moving average reinforces that the Jan-Jun 2022 decline is a cyclical bear, not a structural bear.
Nonetheless, the spread (388.91) between the two moving averages remains wide, and a backing-and-filling process is necessary before resuming its long-term uptrend.
Does this imply SPX trade will consolidate between 3,700-3,800 and 4,300-4,400 before the resumption of the structural bull?
A convincing move above the 10-mo ma at 4,305 hints at a retest of the Jan 2022 all-time high (4,818.62). New record highs signal a rally to 5,175 or the top of its structural uptrend channel.
SPX 40-month Moving Average Chart
The 40-month ma remains a reliable technical indicator to identify the structural trends of SPX over the past 40 years. It is uncanny when SPX breaks down below the 40-month ma, and in the process turns its moving average from up-to-flat trending to down-trending, it warns of the next bear market (i.e., 2000-2002 tech/telecom dot.com and 2007-2009 global financial crisis). The Feb-Mar 2020 pandemic bear decline also found critical support at 2,584.59 or near its 40-month ma (currently at 3,691).
A breakdown below the monthly moving average coupled with the rolling over of the 40-mo ma (trending down) can end the structural bull.
However, a successful test of the 40-mo ma can also lead to the resumption of the May 2013 structural bull.
SPX Daily Chart
Although the six-month cyclical bear has been brutally painful, SPX has yet to breach its 50% retracement (3,505) and the critical 61.8% retracement (3,195) from the 3/23/20-1/4/22 rally.
The ability to rebound from 3,636.87 (6/17/22) coupled with a recent surge above the 50-day ma (3,925.5) is constructive. Retaining the crucial Aug 2020 V-pattern breakout (3,393.5) is also positive.
The immediate challenge for SPX is to surge above its neckline 2 (4,114.65) and neckline 1 (4,222.62), respectively. Above the two former breakdown levels, coupled with a surge above the 200-day ma (4,353) and Jan 2022 downtrend (4,395), reverses the 6-month primary downtrend and signals the resumption of the Mar 2020 intermediate-term uptrend.