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S&P 500: A Long-Term Technical View

naufalsanaullah's picture





 

Looking at long-term trendlines is important to today's trading, as this secular bear market has caused finding antecedent price levels to require stretching back to decade-long charts and long-term secular trendlines are being broken and re-tested.

Here is a look of the S&P 500 from its 1982 secular low to its bull market top in 2007:

There is an obvious uptrend, defined by the gray line in that chart. This uptrend line turns out to be significant support/resistance going forward, as well.

Here is the S&P 500 in June 2008. After a March test of the gray trendline from the chart above, the market breaks below the line on heavy volume, marking the confirmation of a technical reversal of the uptrend line from 1982-2007.

Trendline breakdowns often show re-tests of the trendline, as support broken becomes resistance, before continuing the new trend. After the oversold conditions of summer 2008 and the collapse of the commodity bubble (inflation was the big concern to consumer spending at the time), a retest after the breakdown was even more likely, and in August we got one:

With the trendline broken and re-tested, it was time for the continuation of the trend reversal. And reversing a 25 year bull market should be quite sharp correction. Indeed, the market crashed from there:

Here's the same chart zoomed back out to show the entire 1982-2007 bull market and its breakdown via support trendline breakdown. As you can see, the technicals define the trends quite well:

The purpose of the above exercise, concerning the significant 1982-2007 bear market support trendline, is to display the importance of long-term technical trendlines and how accurate they can time trades to be. Below is the S&P 500 from 2000-present, with a significant long-term support/resistance line at around 1080, about the same level where the market sold off from today and has been finding resistance for the past couple weeks:

Anyone see that major support/resistance line?

Here's a look at the significance of long-term support/resistance trendlines:

 

This chart is of 2000-2007. Red trendlines are drawn in at important support/resistance levels. The levels are:

  • 775
  • 875
  • 950
  • 1010
  • 1080
  • 1170
  • 1315

And now the 2007-present chart, with the same trendlines kept in:

No less than fifteen separate pivots/touches at those support/resistance trendlines.

One specific trendline is of significant relevance at present, and it is the 1080ish level. Here again is the S&P 500 with that level (the same level as highlighted in the first chart at the top), with a zoomed-in chart:

This is a scary chart development for equities, particularly considering that the equity market is in a diminishing-volume rising wedge pattern, the oil market (which bottomed two weeks prior to equities) is finally breaking down from its long-developing ascending triangle, and bond yields (which bottomed three months prior to equities) topped out three months ago and are approaching another breakdown.

Technical analysis isn't an exact science by any means and the above comments aren't to be construed as investment advice of any sort, but the concept of support/resistance trendlines, especially in the context of today's quantified/processor- and algorithm-driven market ecosystem (even before the momo-chasing HFT-executed SLP-financed speculative equity rally off of March lows), is, unlike other technical indicators like RSI and MACD, based in a priori logic. Chart analysis is, to me, just as important as fundamental analysis. A trade/investment thesis is useless without timing the transaction properly.

 


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Thu, 09/24/2009 - 09:17 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

Technical analysis is worthless when you're facing a tsunami of liquidity. Once the Dow breaks 10,000, I expect things will go parabolic.

 

Thu, 09/24/2009 - 09:56 | Link to Comment Anonymous
Thu, 09/24/2009 - 11:33 | Link to Comment snorkeler
snorkeler's picture

Triple secret parabolic

Thu, 09/24/2009 - 13:29 | Link to Comment Oso
Oso's picture

triple dog secret dee doo parabolic.

Thu, 09/24/2009 - 13:57 | Link to Comment Anonymous
Thu, 09/24/2009 - 10:19 | Link to Comment pivot
pivot's picture

come on Leo, be serious.  you have a decent article over there about PE, don't ruin credibility with statements like this. technical analysis is surely not the only thing to consider, but when so many people (computers?) swear by it, you can't totally ignore.

Thu, 09/24/2009 - 17:54 | Link to Comment Anonymous
Thu, 09/24/2009 - 10:34 | Link to Comment fotokemist
fotokemist's picture

How does the volume of the liquidity tsumani compare to the volume of the pit of debt to be written off, etc.?

Thu, 09/24/2009 - 11:48 | Link to Comment percolator
percolator's picture

And fundamental analysis is worth even less than TA "when you're facing a tsunami of liquidity."  The Bulls are playing chicken and while they all think they can get out the door when the fire starts only a few do.  Remember many are not killed by the fire, a lot are trampled to death.

Thu, 09/24/2009 - 12:54 | Link to Comment Anonymous
Thu, 09/24/2009 - 19:37 | Link to Comment john_connor
john_connor's picture

A comment worthy of a topping market. 

Thu, 09/24/2009 - 22:34 | Link to Comment QuantumCat
QuantumCat's picture

Tsunami of liquidity? Do you mean the eternal Keynesian well of public debt?  If you assume there is no limit on the USG's willingness to enslave the taxpayer and people to buy our debt, and you also assume that the FED is willing to destroy itself, then sure... a tsunami of liquidity may rule the day.  Otherwise, your tsunami of liquidity is more like a tiny wave in a huge ocean of debt and contracting credit.

Thu, 09/24/2009 - 09:33 | Link to Comment Anonymous
Thu, 09/24/2009 - 09:39 | Link to Comment Carina
Carina's picture

Naufalsanaullah,  thanks for a great post!  Your analysis and perspective are always very helpful.  Thanks again!

Thu, 09/24/2009 - 09:51 | Link to Comment Anonymous
Thu, 09/24/2009 - 09:51 | Link to Comment Anonymous
Thu, 09/24/2009 - 14:00 | Link to Comment Anonymous
Thu, 09/24/2009 - 10:29 | Link to Comment AR
AR's picture

Very good summary.  Good work and perspectives...

Thu, 09/24/2009 - 10:39 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

The MSCI global stock index is up 66% from the March lows. Everybody is expecting a selloff in stocks, which is why it won't happen. There is a lot of performance anxiety out there driving equities higher. I use TA as a tool, but I also recognize its limits, especially in these type of markets which are driven by massive liquidity flows. All I am saying is be careful with any short positions here because you might end up hurting as markets grind higher.

Thu, 09/24/2009 - 10:53 | Link to Comment Grand Supercycle
Grand Supercycle's picture

DOW / SP500 / FTSE daily chart shows increasing topping action.

Weekly chart remains bullish so far ...

Monthly chart remains bearish.

 

MARKET TRENDS :
www.zerohedge.com/forum/market-outlook

Thu, 09/24/2009 - 11:12 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

If you really want to hear a bear growl, listen to this Tech Ticker interview with Peter Schiff who thinks Ben Bernanke is wrong, the economy is getting worse, not better. Mr. Schiff also thinks the rally is doomed and gold will hit $5,000.

Thu, 09/24/2009 - 11:24 | Link to Comment naufalsanaullah
naufalsanaullah's picture

Mr Schiff ignores the political leverage the United States has over the rest of the world and the economic leverage that represents through its ability to debt inflate and debase its currency without panic liquidations from foreign creditor banks/nations. This causes creditor nations to have to inflate their own currencies to stimulate their way out of domestic crises that they can't finance through real debt repayments/interest payments from the United States, which shifts hyperinflationary/currency implosion risks to those creditor nations because of political mutually assured destruction from the ultimate too-big-to-fail: the United States. This is why I think China, Mexico, and the Eurozone will see much worse currency crises than America.

Thu, 09/24/2009 - 11:40 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

naufalsanaullah,

I agree with you that other countries are more vulnerable to currency crises. One thing that bugs me with Peter Schiff is that he dismisses the possibility of debt deflation, focusing on classic hyperinflation. For his doom scenario to materialize, you need unemployment to soar to 25%, otherwise it is inconsistent.

Thu, 09/24/2009 - 12:16 | Link to Comment naufalsanaullah
naufalsanaullah's picture

debt deflation can't happen with bernanke at the helm. he has quite literally infinite power to debt inflate without sparking a mass exodus/run on the dollar. the fdic insures 250k per insured deposit. that's money that can't by definition leave the money supply (assuming treasury extends line to bail out dif). the fed's balance sheet will probably end up well north of $5t. that 1 protects bank liquidity to prevent any sort of deflationary spiral like the 30s and 2 even protects the solvency of insolvent institutions. the liquidity won't get trapped anywhere without the fed's consent; the interest on excess reserves sequesters the funds until they're sufficient to be deployed into soaking up asset losses and inflating the real economy. for now, they sit as excess reserves and are being deployed strictly in equity/commodity markets. the "inflation" that is showing up in these markets goes to show the power of the federal reserve to combat debt deflation through dollar debasement.

Thu, 09/24/2009 - 12:43 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

Given all the liquidity, I agree with you that asset inflation will be the outcome. But don't be too quick to dimiss debt deflation down the road. If we get the W-recovery, the next leg down could be worse, causing all sorts of pain at financial institutions. The FDIC insurance is a joke (how many people you know have $250,000 in their bank?) and if unemployment explodes the next time around, then watch debt deflation come back with a vengeance. The erroneous belief that the Fed can easily print money to stave off debt deflation is extremely dangerous.

Thu, 09/24/2009 - 12:47 | Link to Comment naufalsanaullah
naufalsanaullah's picture

it's a matter of if the fed can inject enough liquidity to mop up debt obligations. the fed's power is effectively limitless, given the politicization of central banking, especially in regards to foreign creditors. as long as the usd can remain in debasement mode, debts can be liquidated through inflation (partial default at its essence). the money destroyed through deleveraging can, will, and is being mopped up by the money created by the fed.

 

Thu, 09/24/2009 - 12:52 | Link to Comment Great Depressio...
Great Depression Trader's picture

Chart man. Like the technicals. Respectfully disagree with your analysis. You say the fed "even protects the solvency of insolvent institutions". The reality is that the whole world knows that the US is sitting on some bad bad paper. So the banks are toast and so is there funding operations, absent the fed.

Next, US Gov expenditures. Understand that the US is spending money like a Orange County housewife gone wild. US is spending 900billion a year on defense (the wars, army, marines, air force, navy, VA, state department). Next, Social Security payments are going to drain the system more. The Fed will expand its balance sheet to 5 trillion as the currency gets debased badly. Also consider Fannie, FRE, FHA, AND GINNIE, who will all be losing money soon. No accounting trick will be able to hide these losses as the FED will then forced to monetize more?? Yikes.

Finally, the US is hostile for manufacturing. Good luck opening a factory anywhere. There is too much red tape in USSA. Fees, permits, licenses, restrictions, emmissions, environmentalists. Jobs will continue to flow out of the US as a result of the red tape.

But in the meantime, deflation will reign as people dont and wont have access to credit anymore. Remember, 6000 personal bankruptcies daily, with 300,000 foreclosures monthly. Credit scores are getting wiped out thereby curtailing credit growth. 3.5 trill in bad CRE, 5 million more foreclosures, plus tons of corporate debt blowing, the deflationary pressure will be too strong. Ben will have to literally give money away to everyone, not just a few financial institutions.

So deflation first, then inflation.

Thu, 09/24/2009 - 14:04 | Link to Comment naufalsanaullah
naufalsanaullah's picture

I agree deflation first, then inflation. I don't really know why you "disagree" with my analysis. The whole world knows the US is sitting on toilet paper, yes, but the whole world is in a position incapable of doing anything substantive about it.

When the entire world buys into a Ponzi scheme and the schemer has nukes to protect it, a run on the currency is not what occurs.

 

Thu, 09/24/2009 - 15:49 | Link to Comment Great Depressio...
Great Depression Trader's picture

The whole world knows the US is sitting on toilet paper, yes, but the whole world is in a position incapable of doing anything substantive about it.

This is where I disagree with you friend. As a citizen of the US you have a vested interest of this scenario playing out. Dont let your personal interest interfere with your knowledge and vision. Presently, the rest of the world is bailing out the US out of fear of disrupting the status quo of them exporting and us importing. True, the powers that be in these countries dont want the structure to fall apart and thus will put pressure to debase alongside the US. However, nationalism in those countries is much stronger and public outrage is much quicker to erupt. I was in Greece, Italy, Serbia, Croatia for the last seven weeks and MOST people knew the $$$ was trash. Europeans and Asians are smarter than our policymakers think. Remember how the laughed at Geithner in China RE: "your US assets are safe"? Even your typical Greek news hour lately discusses Bretton woods and how the dollar is toast, how Nixon severed the relationship with dollar and gold. People are knowledgebale, not like in this country where Prozac and Xanax have infested the minds of millions. Im betting on foreign governments pulling the plug on US bailout when the currency troubles begin to hit in EU, Asia.

 

Thu, 09/24/2009 - 19:27 | Link to Comment naufalsanaullah
naufalsanaullah's picture

What are creditor nations going to do when US debases to debt inflate? Liquidate their Treasury holdings? A run on Tsys would kill their own export-based, capital account surplus nations. Their biggest asset is our liabilities. This is a recipe for war, a war that America would undoubtedly win with its nukes. It would turn quickly into protectionist MAD arms race.

Thu, 09/24/2009 - 19:27 | Link to Comment naufalsanaullah
naufalsanaullah's picture

What are creditor nations going to do when US debases to debt inflate? Liquidate their Treasury holdings? A run on Tsys would kill their own export-based, capital account surplus nations. Their biggest asset is our liabilities. This is a recipe for war, a war that America would undoubtedly win with its nukes. It would turn quickly into protectionist MAD arms race.

Thu, 09/24/2009 - 14:11 | Link to Comment Anonymous
Thu, 09/24/2009 - 13:33 | Link to Comment Anonymous
Thu, 09/24/2009 - 12:44 | Link to Comment pooplagrande
pooplagrande's picture

Gold is overdone and will deflate with the market and other commodities. The underpinnings of the economy are filled with dry rot and it is simply covered up by heavy gov. medication. They can keep the game going for a bit longer, but the truth will rise to the surface and people will shed their summer dresses like a drunk sorority girl on spring break.

Thu, 09/24/2009 - 13:08 | Link to Comment RagnarDanneskjold
RagnarDanneskjold's picture

The Fed can only create debt. The Treasury controls the printing press.

Credit derives from the latin word for trust. Debt can only increase in a system that is trusted by the people. If they do not trust the debts can be repaid (by themselves or others), they will not borrow and the banks will not lend, and deleveraging will take place.

Trust can be restored through the creation of paper, a transfer of trust from the currency to the debt. The people lose faith in the currency but trust that debt can be repaid.

People who expect high inflation should find out what the presses are up to...

 

http://www.federalreserve.gov/generalinfo/foia/gifjpg/2009newcurrchart2.jpg

http://www.federalreserve.gov/generalinfo/foia/2009newcurrency.htm

 

Thu, 09/24/2009 - 14:20 | Link to Comment DBLTapViper
DBLTapViper's picture

Mish wrote this - And I find the truth in it to be..... wonderfully simple!

Bernanke is not a wizard and neither is Greenspan. The difference is Greenspan had the wind of consumption blowing briskly at his back. Bernanke is on the backside of Peak Credit with a breeze of frugality blowing briskly in his face. Attitudes make all the difference in the world.

 

 

Thu, 09/24/2009 - 14:46 | Link to Comment Anonymous
Thu, 09/24/2009 - 18:26 | Link to Comment River Tam
River Tam's picture

Great analysis.

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