Massive Broadening Top on the S&P 500
Updated
The last several years have been a massive broadening top on the S&P 500, shown on the chart. The recent crash due to the virus ran prices right down to the lower line of the pattern. We've bounced a bit, and could continue bouncing to the midpoint. Longer term we either consolidate within the pattern, build support and eventually continue higher (the bull case)... or we continue lower and break down out of the pattern (the bear case). I favor the bear case.
The broadening top price target shown on the chart, is a rough estimate of how far the chart pattern estimates the drop could go if we break down out of the pattern. That's around a 65% loss on the index from all time highs and I think that's conservative. I suspect the bear market that has just started is deflationary in nature and could be the worst bear market of our lives. Historical examples of deflationary bear markets are the 30's in the US and the 90's in Japan which took markets down 80%-90%.
This is not going to be better in a month or two even if the virus situation gets under control. The debt/economic situation was not good (despite what was claimed) and now the virus has probably started a deflationary debt spiral. We're already seeing unheard of unemployment spikes, catastrophic asset drops in markets and commodities like oil, and massive stimulus actions. Next we are going to see significant spending cutbacks (from businesses and individuals), more defaults, bank failures, more unemployment, credit contraction, and even more government and Fed actions to try to hold things together. These events feed on themselves in a vicious circle that could take years of market and asset value losses before it bottoms. You can bet when it does bottom assets will be very undervalued.
Note that all lines on the chart are roughly placed and no target price should be considered exact. It's just to give a general view of the larger picture. Timing can vary. The 30's bear bottomed in a couple of years but the Japanese market went down slower for a decade (and hadn't ever recovered).
The broadening top price target shown on the chart, is a rough estimate of how far the chart pattern estimates the drop could go if we break down out of the pattern. That's around a 65% loss on the index from all time highs and I think that's conservative. I suspect the bear market that has just started is deflationary in nature and could be the worst bear market of our lives. Historical examples of deflationary bear markets are the 30's in the US and the 90's in Japan which took markets down 80%-90%.
This is not going to be better in a month or two even if the virus situation gets under control. The debt/economic situation was not good (despite what was claimed) and now the virus has probably started a deflationary debt spiral. We're already seeing unheard of unemployment spikes, catastrophic asset drops in markets and commodities like oil, and massive stimulus actions. Next we are going to see significant spending cutbacks (from businesses and individuals), more defaults, bank failures, more unemployment, credit contraction, and even more government and Fed actions to try to hold things together. These events feed on themselves in a vicious circle that could take years of market and asset value losses before it bottoms. You can bet when it does bottom assets will be very undervalued.
Note that all lines on the chart are roughly placed and no target price should be considered exact. It's just to give a general view of the larger picture. Timing can vary. The 30's bear bottomed in a couple of years but the Japanese market went down slower for a decade (and hadn't ever recovered).
Trade active
Rallied up to the midpoint FAST. Could go as high as 2800, but this is a good point to start adding shorts.Note
Hit 2800, which is rebound to the midpoint using absolute high/low rather than monthly close data. It's just a guess, but I suspect this is the end of the rebound rally.Note
We've now run up so far we're only 150 points or so from the top of the broadening top pattern drawn above. A possible situation is a move back to the top of the broadening top (maybe around 3350) and then there will be pressure to fall back to the bottom of the megaphone.
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