Market Analysis

$SPX 2126

Oh yea, laugh all you want, but I feel obliged to present a technical case for $SPX 2126. Why? Because it’s there. And my eyes are wide open. Central banks across the globe may launch their bazookas in full force, President Trump may just cancel the China tariffs when push comes to shove or even get a deal done, all of which could easily speak a massive market rally and render this technical case a mockery. At least in the short term.

At the same time, multiple technical and even structural considerations are aligning that suggest that an $SPX 2126 target is not only possible if any of the above mentioned factors either don’t come to fruition or don’t yield the desired results, but the target actually makes technical and structural sense. In short, it’s the case that says the global macro picture wrestles control away from the faces of intervention and markets realign with historical precedence.

And let me make the case simple and straightforward.

Firstly many of my readers are familiar with the megaphone we’ve been talking about since April 10 in Combustion and again re-iterated in Sell Zone in June:

$SPX hit the upper trend line in July and has seen a technical rejection triggered by various news events. Powell’s communication issue with “mid-cycle” adjustment, and additional China tariffs imposed by President Trump. These were the triggers, but the technicals had suggested this area being key resistance ahead of time.

Why? Because the value line geometric index, among other technical signals, had suggested the rally was bogus. It was weak underneath showing lower highs indicating weakening participation:

Now also note in the chart above that a rising wedge has formed throughout in 2019. $SPX has broken the wedge to the downside in the last couple of weeks and if you impose it into the larger megaphone structure you get this image:

A megaphone, or broadening top, on its own may or may not be bearish. After all price can also break higher, then find support on a retest and expand the price range. As of now this hasn’t happened. But breaking a rising wedge is generally a very bearish event and bulls have some major repair to do. In a hurry too or the recent rally could simply suggest a retest of the wedge trend line and if the retest fails it may have larger consequences.

Simply put it could confirm the larger broadening top structure which would ultimately suggest a move toward the lower trend line:

Oh I realize, it’s all speculative at this stage and as long as the 200MA holds on any further corrective moves markets may be fine especially in light of upcoming central bank intervention or trade war resolution, hence eyes wide open.

But recognize another technical point of confluence. This lower trend line is pointing toward a specific price zone. Not only the 2015 highs and initial resistance then support in 2016, but also the .382 fib going back to the 2009 lows:

And with current market highs that fib sits right at 2126. There, that’s the technical target right near the 2015 highs. Keep in mind the big bull run from the 2009 lows has never had a proper correction. Quick dips yes, even aggressive ones like the one during the December 2018 rout. But none have lasted very long at all. In fact these corrections have been so quick you can’t even really see them on yearly charts.

And it is the yearly charts on some key stocks that highlight how uncorrected this market really is. I’ve shown charts like these before, but they deserve to be highlighted again in this context. And yes I’m showing linear charts that not only show vast extensions above the yearly 5 EMAs, but they also show how some of these stocks have gone virtually uninterrupted for 10 years straight:





All of these charts, and these are mere examples, are technically and historically vastly extended and at high reversion risk. Just a reconnect to their yearly 5 EMAs, which they historically do in most years, implies enormous correction risk supportive of the larger market index to follow suit.

Which brings me to a final point, that of what I described in Hitting the Wall: Market valuation above GDP:

As you can see in the chart above we are wildly extended above the historic mean. In July we hit 146% stock market valuation to GDP. Following the 2000 market top markets dropped to 110% of GDP, following the 2007 top we dropped to 92%. That’s on an annualized basis. Is aresizing back to 100% or 105% or so unreasonable in the larger context? I propose not. If you presume a similar trajectory given the current high of 3028 on $SPX you get a range of $SPX 2075-$2177. What’s the middle ground between these two numbers? $SPX 2126. Cute.

Oh here he goes again. Doom and gloom. No. It’s not doom and gloom, it’s just technical which is entirely reasonable in any historic context. It would reconnect extended stock charts with long term moving averages, it would bring the market closer in line with its historic mean and it would satisfy technical confluence targets.

The doom and gloom part, however, would be that such a size move, 30% off of the current highs, would imply a global recession unfolding, which 10 years (going on 11) after the financial crisis would also not be an unreasonable proposition. After all recessions happen on average every seven years and this one is long in the tooth.

Bottomline: There is a technical and structural case to be made for $SPX 2126, a case that the forces of intervention are keen to want to prevent and, as long as they retain control over the price narrative, they may well do so. But if they lose control you have a technical price target the timing of which is unknowable at this stage as there’s still plenty of opportunity to rally and recent lows are holding for now, but bulls need to invalidate this technical case. And so far they haven’t.

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Categories: Market Analysis

16 replies »

  1. Dear Northman Trader, I agreed with you that SPX will drop to 2126. I have been calling it for a few year now for SPX to drop and SPX keep going higher. I have 2 questions for you. first question is when do you think SPX will drop to 2126, and second question is how do you plan to bet on it for profit. Thank you.

    • The S+P high from March 2000 was approx. 1545. The S+P high from Oct. 2007 was approx. 1565. We blew through them without a serious retest . That is support , therefore that will be retested eventually- so an approx. 49% drop will be a likely event eventually. Hey Sven – I just did your analysis in 2 minutes ! 🙂 Enjoy your site and your wisdom . Now you can go to the beach !

  2. A drop like that would give the CB’s a further few years to kick the can, would it not? The old escalator elevator trick.

  3. Excellent technical analysis! I really appreciate it.
    Being prepared for the future is half the battle, and this certainly is a beacon of light.

  4. I really thought the TOP was in 2015….how wrong I was. Then, last summer (october) I finally thought I nailed it….until once again, I was proven wrong. Since then, I simply do not short the market anymore. Simply too difficult. I do remain convinced we will see an unprecedented crash at some point….but timing this….requires more luck than skill in my view.

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