SPX Index Nearing Another Inflection?
On the charts, a technical pattern can tell a story of what to expect in the future. A single trend bar that appears on the price chart does not convey much. However, when many other bars develop on the chart, this can lead to an uptrend, downtrend, or sideways trading range trend.
At times, prices may begin to pull back in an uptrend, leading to a well-defined parallel uptrend channel. A price channel is a continuation pattern that slopes upward. The upper and lower trend line define selling and buying pressure, respectively.
Sometimes, a breakout occurs above the top of a parallel uptrend channel. A breakout in the direction of the uptrend can lead to the acceleration of the advance. Aggressive traders and momentum type investors love accelerated ascending channel breakouts because it often leads to an explosive rally to the upside.
As with most price patterns, other aspects of technical analysis help to confirm the breakout. Because technical analysis is just as much art as a science, it tends to be subjective and open for interpretation.
The following technical developments over the past few years merit discussion. The first inflection point occurred during late-Spring 2013 and specifically in May 2013. A breakout above 1,576.909 confirmed the end to the 2000-2013 structural bear/trading range trend. Most importantly, it signaled the start of a structural bull trend.
A second critically important technical development occurred in August 2020, soon after the Feb-Mar 2020 Covid-19 pandemic induced bear market decline. A V-pattern breakout above 3,393.52 during Aug 2020 reaffirms the May 2013 structural bull trend is not only alive and well but also sustainable. Based on the height of the technical base, the breakout suggests a +1,201.66 points rally or an SPX target at 4,595, intermediate-term.
Soon after the V-pattern breakout in August 2020, another critical technical development occurred in December 2020. A 2-plus year broadening or megaphone pattern warned of a significant SPX top. Although this is typically a bearish pattern, the V-pattern breakout above 3,393.52 (Aug 2020) coupled with the negation of the broadening top or megaphone pattern via a breakout above 3,700-3,725 (Nov/Dec 2020) signals a bullish continuation pattern.
The broadening pattern/megaphone breakout renders a minimum target of 61.8-76.8% of the height of the technical pattern (1,462), which is added to the breakout level (3,700-3,725) to arrive at an SPX target of 4,604-4,823. A 100% move would bring SPX to 5,162-5,187. [Refer to the SPX weekly chart for further information].
We now fast forward to today or over one year after the Covid-19 pandemic global shutdown and the bear market decline. Uncertainties remain regarding the Delta variant and whether it will peak or escalate into the fall/winter. The timing of the Fed tapering continues to create market volatilities. Depending on the headline news, it can lead to sudden rallies and sharp declines.
S&P 500 Index (SPX) is approaching another inflection point. The outcome will likely decide the next directional trend.
The dominant and prevailing trend of the SPX Index is an 11-year uptrend channel between 3,130-3,343 and 4,532. SPX is nearing the top of its pivotal uptrend channel. It is also approaching the increasingly important V-pattern breakout target of 4,595. A convincing breakout above 4,532 coupled with a surge above its V-pattern breakout target confirms an accelerated channel breakout and suggests +1,402 points or a rally to 5,934, long-term. [See the SPX monthly chart]
It is rare to witness outside-year patterns in the SPX Index. In 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 (May 2013-present). The ability of SPX to maintain above its 10-year ma (now at 2,631) and its internal trend line (blue dash line now at 2,404) during the Feb-Mar 2020 decline confirmed the continuation of the May 2013-present structural bull.
The two positive outside year patterns (2016 and 2020) have quickly propelled SPX to close to the top of its 100-year uptrend channel, now trending up at 5,149. Since this resistance zone is the top of the generational uptrend channel between 1,174 and 5,148, a convincing breakout would be technically significant as it can impact the marketplace for many years and possibly decades. [Please refer to the SPX yearly chart for additional information]
A failed breakout above key resistance at 4,532-4,595 may be bearish, prompting a consolidation, correction, or worse, the start of an SPX bear decline.
Based on the weekly chart, initial support rises to the 50-day/10-wk ma at 4,378-4,424, and below this to the 200-day/30-wk ma at 4,045-4,198. The extension of the top of the broadening pattern at 3,849-3,964 remains pivotal support. The top of the broadening formation at 3,588.11 and the V-pattern breakout at 3,393.52 represent additional crucial support.
From the monthly chart, initial support rises to the 10-mo ma (4,046), and below this to 3,130-3,393.5, coinciding with the bottom of the 2010 uptrend channel, 30-mo ma, and the Aug 2020 V-pattern breakout.
On the yearly chart, initial support rises to 3,663-3,760 (2020 high and 2021 low), and below this to 2,192-2,631 (2020 low, internal trend line, and the 10-year moving average). The 30-year ma (1,568) and the bottom of its 1920s uptrend channel (1,174) represent generational lows (support).