MystryBox

Massive Broadening Top on the S&P 500 (Updated)

Short
SP:SPX   S&P 500 Index
This is an update of my previous idea showing the multi-year topping pattern happening on the S&P 500 . The previous post is linked below in related ideas.

Since that post we've had an incredibly aggressive rally, breaking above all estimated rebound levels, closing all gaps in the March decline, and now looking to challenge all time highs. But the big picture remains the same: we're in a massive, volatile topping pattern at the tail end of an aging bull market. Here are a few things that are new to the situation since the previous update:

  • Two months of gaps all the way up (seen on a daily chart ) that will eventually fill
  • An over-extended rally, that might better be called a mania, not seen since the 2000 tech bubble
  • The highest valuations ever by some measures
  • The lowest put/call ratios ever (showing nobody is concerned about downside)
  • The largest monetary interventions ever
  • One of the highest extensions above the 50 day moving average ever (and who knows how many other overbought indicators)
  • Noob retail traders jumping into the market like nothing seen since the 2000 tech crash
  • Unprecedented protests/social unrest, further adding to the economic issues and breaking down social distancing norms, sure to bring on another wave of Covid

Meanwhile the economic situation remains positively terrible with nothing by comparison in history but the Great Depression. Basically we're seeing a stock mania, a massive disconnect from fundamentals, happening inside of a recession--something that has never happened before. Thanks Fed!

So looking at the situation objectively, I just can't join all the bulls running so madly ahead while cheering for new highs. The economic situation says the the bull born in 2009 is dying if not already dead. And technically what I see is we've now rallied back up near to the top of the multi-year pattern. So what's the upside? Maybe 100-150 points to the top of the pattern. And the downside? The risk of a 1000 point decline that could be a 2000 point decline if we break the March lows. Are you kidding me? Has there ever been a worse risk/reward in history? Nobody in their right mind is buying here. And that's just it, the market is in a mania--participants are not in their right minds.

Some people are saying the March decline was just a correction, and maybe they're right. But what that means is we haven't even seen the bear yet. The increasingly large drops to the bottom of the megaphone the last few years have just been the initial moves as the bull comes to an end... just a warm up to what is eventually coming. What are we going to see when the market finally turns if the 35% crash in March was just a shudder from a tiring bull? Holy cow.

It's times like this where it's worth pointing out that cash is a position, and it's a sane position that easy to hold as the world goes insane. At least if you can avoid the fear-of-missing-out mania now running rampant through the markets.
Comment: Big drop so far today, and I think it's only starting. Pattern on the 5 minute chart looks like a bear pennant, and if it breaks lower we'll fall another 2.5% or so today. The market might be starting the process of waking up to reality: Deflation not disinflation (nor inflation); Depression not recession.
Comment: Rapidly dropping that additional 2.5% now to hit the very short term target suggested by the opening bear pennant pattern--around 5% down. Might bounce a bit from there. Not that I would go long. This is all short term nonsense. Long term I think we're going to mainly go down for a long, long time (years)... until nobody wants to buy stocks or even think them again. As I've said several times, deflationary markets are ugly. The 1093's market lost 87% of its value before it hit bottom. The Japanese deflationary market in the 90's lost 80%.
Comment: That should be "1930's market" in the previous comment, not 1093's, heh.
Comment: This chart is still in play as the S&P 500 seems determined to hit the top blue line of the megaphone (or even poke above it). We're now less than 100 points on the S&P away from that line, and from all time highs on the index. A run up to 3400 would be both slightly above the megaphone line and would make new all time highs. Perhaps the index breaks 3400 this month, gets everyone all excited for new highs, and ends the month falling back under 3400. Or maybe we just keep going up forever, because why not? Stocks only go up, right? Especially in an election year. Who cares about the actual economy.
Comment: Looks like the S&P 500 touched the top of the megaphone pattern today... and then sold off into the close.
Comment: We're now above 3400 and above the top of the Megaphone pattern. If the pattern holds, we'll be back below the pattern top by the end of this month (which is next Monday). Top might be near.

Or maybe we just go upwards forever?
Comment: Incredibly the S&P 500 has broken over the top of the megaphone pattern and held to make a monthly bar. This looks like a breakout UP.
Comment: A significant decline today, and that's been a rare thing. If we have another decline tomorrow that will be even rarer--we haven't had a good back-to-back decline this entire rebound rally. Another big drop and we'll be back in the megaphone.

A bonus interesting factoid... Sept 3 was also the day of the very top in 1929 before the crash that led to the Great Depression.
Comment: The market has now fallen back into the megaphone pattern.
Comment: Unless there is some insane rally in the next two days, the end of this month will put us clearly back in the megaphone pattern on the monthly chart and heading down.
That's a LONG way down to the lower end of the megaphone around 2150--a -34% drop from today's close. And even if we fall that far, we're still in the consolidation pattern of the megaphone and arguably not yet in a bear market. We'd have to fall even farther than 2150 to breakout below the pattern if we're headed into a bear market.