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There is no doubt that the biggest stock index in the world is the S&P500 in the United States. Many focus on the Dow Jones Index; however this is only made up of 30 leading stocks. The S&P500 is made up of 500 stocks across more diverse sectors and is a better measure of the overall health of the U.S. equities markets. We are at a very interesting area in price on the S&P500 and I wouldn’t put much more value on the upside. I’ll show you why.
Chart 1 is the quarterly chart of the S&P500 Cash (physical) market from the early 1970’s. There was a major bear market low that occurred in September of 1974 and from here the spectacular rise followed that lead to the bull market top in 2000. The range is from 60.96 (yes it was once that low) to the top of 1552.87. Taking this range and projecting it from the Bear Market low in October of 2002 (768.63) we find the 50% Danger Zone is 1514.58, extremely close in relative terms to the top in 2000. In another words the bear market was a 50% pull-back of the all-time major range for the S&P500.
Chart 1 – S&P500 Cash – Quarterly Bar Chart
click chart for more detail
Chart 2 shows the market action on the weekly chart starting from around late 1997. Big double tops like this are tough to trade – especially if you are going to use something like the sharp leverage of the futures market. The best way to trade it and be smart is to wait for confirmation of the first low weekly swing top. But even that can be fraught with danger.
Chart 2 – S&P500 Cash – Weekly Bar Chart
click chart for more detail
What’s my opinion on how things could unfold? Well firstly, it is all going brilliantly for the call on the SPI200 I made over 12 months ago, for a late 3rd quarter top. With this is mind and knowing the nature of markets, who try and fool most of the people, most of the time, I can imagine we will see some form of dead-cat bounce of the resistance and then a re-test. It is a 50% Danger Zone and Safety in the Market clients should be well aware of the test and re-test rules. Volume will be a useful indicator here as well.
There is a gap on the weekly bar chart that I have indicated on Chart 2. This would be one area to watch for support before a re-test. Now setting up Road Maps on any market means you are starting to tell the market what to do and not letting it tell its own story. However experience tells me exercise caution for now, but be on the ball, this market is around very strong resistance on a very big picture.
Until next time…
Noel Campbell
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