| S&P's 15-year accelerated uptrend stays broken |
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| Written by George Albert |
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(As published in Morningstar) Please click here to view the article published on the Morningstar website We use support and resistance and trend to trade stocks and it has worked quite well. Please click here to view our Weekly profit and loss statement The 15-year accelerated uptrend of the S&P 500 which began in 1994 was broken in October 2008 and continues to stay broken as the April and May 2010 price action shows. This is bad news for the bulls as the uptrend has failed to resume on grandest of time frames, the monthly chart. Let us look at the chart of the S&P 500 below. The steady uptrend of the S&P 500 began way back in 1982. Those were the times of Ronald Reagan that inspired confidence in the economy. The year 1982 was the base of the bull run which lasted till 2000. The white upward sloping line shows the steady uptrend and is a confirmed trend line as it has several touches. The touches are shown by white arrows. Notice that the steady uptrend line acted as support in March 2009 to stop the massive sell off, which resulted in the current rally. However, more important is the accelerated uptrend line shown in blue. The steady trend started to accelerate in 1994, where the blue line begins and is also shown by a blue arrow. The market rallied and fell strongly only to be supported by the blue accelerated trend line in 2003, which led to another rally. The rally was stopped at 1557 as shown by the yellow horizontal line at the top of the chart forming a double top. Now comes the most important aspect in October 2008. The period is shown by the white vertical line with the dates at the bottom. Notice that in October 2008 the index broke below the accelerated blue up trend line and continued to fall. The prices then touched the white steady uptrend line and rallied to hit the underside of blue line again. Not only did the index fail to close above it, but there has also been a huge sell off. The blue line which acted reliable support for more than a decade has now turned into resistance. Unless the index closes above the blue trend line the market will have a propensity to fall. It's possible for the markets to continue rising hugging the blue line, but technical analysts believe that trend line touches generally cause reversals. If prices reverse strongly from the blue line and breaks of the white trend line it will be extremely bearish for the long term outlook of the market. Remember that the white trend line begins nearly 30 years back. The price action so far indicates a bearish future. Here is a reason. In a bear market prices make lower low and lower highs in a bull market prices make higher highs and higher lows. The S&P 500 made an equal high at 1557 as shown by the horizontal line at the top of the chart. In effect it failed to make a higher high. It then made a lower low at 666 in March 2009, which was lower than the 2002 lows in the 760s. Both the lows are shown by yellow horizontal lines. Prices have yet to make a lower high to confirm a bear market but the fall of the S&P 500 in this month surely does not augur well for the bulls. As was seen in the bear market of the last two years. If the US markets fall so will the rest of the world. It's hence time to be cautious on the long side and start looking at the short side of the market. Chart Analysis |
