Despite breaking below the red trend line dating back to 2012, SPY bounced on a weekly basis quite forcefully off what looks to be a more important trend line. In fact in comparing the 2002-2008 bull market to the current, both have very similar structures. The current market has clearly had a much steeper ascent in prices compared to 2007, but both are similar in that a multi year price channel formed that was ultimately broken to the upside.
Both successfully back tested that channel break before going on a quick ascent in prices. As of two weeks ago, both now have successfully tested the trend line for a second time. In 2007, that test set up a multi month move to marginal new highs before running out of steam. It's quite possible the bounce last week off this trend is also setting up for this same move. A shorter term pattern linked below also supports this. If so, I suspect prices will put in new ATH's in Nov with a final target of 208-212 in late Dec or Jan. The new highs in 2007 were short lived and prices went back to test the line once again, this time leading to a break and a very quick move to the bottom of channel. If this same line of our current bull market is also breached, I would expect a similar fast move to the lower channel. In 2007 the final leg higher did put up a divergence with the weekly RSI, something worth watching to see if the current market will follow the same path.
The current market dropped about -10% in 4 weeks and so far has rallied 8% in about 8 days. Despite seeing so many comments about how abnormal this move is, it has lined up near perfectly with how SPY handled the trend line break in 2007.
Lesha22
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so we are going back to test 192? if so.. will the move be violent as well?
SMP99
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well i have 194.50 has my first target for a pullback. At that level I would reassess, but in general a move to 192's would be completely normal. In fact, going all the way back to 190's to fill the gap would not even exceed a 50% retrace. And yes, could be some very quick moves. Especially with QE ending today and Federal reserve set for Wed.
Lesha22
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so i take it you don't think they stop next month?
SMP99
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Stop the QE? no clue on that.
SMP99
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Directly prior to the 2007 peak, SPY dropped -12% in about 4 weeks. Then rallied more than 8% in 7 days right back into the trend line that broke.
SMP99
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Close up of current trend
SMP99
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Close up of 2007 top. Breaking the secondary red trend line caused problems short term but did not prevent from reaching new ATHs. This week, SPY could test the current secondary trend line, may also cause some short term problems.
The current market dropped about -10% in 4 weeks and so far has rallied 8% in about 8 days. Despite seeing so many comments about how abnormal this move is, it has lined up near perfectly with how SPY handled the trend line break in 2007.