Has the S&P 500 topped?
I first touched on this subject a few weeks ago. Now, with the S&P 500 trading sideways to lower, I thought it was time for a further examination.
You may remember in my recent article I pointed out how the E-mini S&P was testing important five-and-a-half-year trendline resistance at around 2400. I’m switching my analysis to the S&P 500 cash index today. This tends to be more closely followed than the futures.
S&P 500: weekly chart
In the weekly chart below you can see that trendline going back to October 2011. The index had in fact been in a nice clear 45° upward-sloping trend channel from the beginning of 2012 up until mid-2015. The channel broke in August 2015 and the index corrected by close to 10%. You can see that the index re-tested the lower trendline of that channel at the end of 2015. It then fell further by the beginning of 2016.
From a small double-bottom low at 1812/1810 the index has climbed steadily through to the end of 2016. Around last December we got the beginning of the ‘Trump rally’ which took us very quickly this year as far as an all-time high at 2400.98. This represents a rally of 590 points or almost 33% in just over 12 months. That’s a tremendous return for any investor.
However, more importantly, from the day Trump won the presidency we’ve seen a rally from 2084 up to 2400. That’s a 15% gain in just four months so one could certainly argue this is a typical panic-buying parabolic rally. This is typical of the end of a bull market. The enormous gain is based purely on speculation that the new president will work wonders for the US economy.
Focus on volatility
So, back to the weekly chart above. You can see that it has taken us just a year to recover from the late-2015 correction to finally re-test the trendline going back to the end of 2011. So I’m speculating heavily here that the index is making an important peak ahead of a significant correction.
On that note, it is interesting to look at the market volatility index or VIX. The quarterly chart below shows all the data I have going back to 1990. In 1993, the index bottomed at 8.89 and it didn’t return to anywhere near that level for 13 years until 2006 when it bottomed at 9.39. I’ve drawn in the obvious trendline by joining these two low points and we get the trendline today at exactly 9.79.
Looking closely you can see this trendline has held perfectly when tested 11 years later by the most recent candle. In fact, this low point was hit on 2 February 2017 at 9.97. There is absolutely no question that the VIX is a cheap punt at this level. If history repeats itself we will see an explosion of volatility in the months ahead, just as we did from 1994 and from 2007.
It’s very interesting to note that the VIX has held a 23-year support trendline. This shows that the market in general is extremely complacent and not factoring any risk to the downside. And this just as the S&P hits important resistance.
Daily chart: a closer look
So what if I’m right, the index just peaked and we are about to see a significant correction? What are the targets?
I’ve drawn a trendline from the US election day in early November (trendline 3). You can see we are sitting just above that trendline as I write, at 2370/75. So, if we hold below 2370 in the days ahead before the weekend, it’s clear this trendline will have been broken. This is of course a further significant negative signal at least in the short term.
Trendline 1 is longer-term and goes back to the middle of April 2016. If we fall further into next week we would meet this 11-month trendline support at around 2345. A break below here could obviously accelerate moves to the downside to target the January high of 2301 and the December high at 2277. Then we’d hit the important 100-day moving average and the first 23.6% Fibonacci support at 2266/2261.
How far will we fall?
This might sound like a long way down, but in fact it is only around the lows of January. Remember, we spent the first three weeks of the year hovering around 2255/2280. This would only represent a drop of around 135 points or 5% – a very healthy correction in a bull market.
A break below this important support level of 2266/2261 signals a move towards the 200-day moving average at 2210/2200. Beyond this we could fall as far as important Fibonacci support at 2180/2175. There is also good support here from trendline 2. This goes back to the end of June 2016 and joins up with the low of November 2016.
A drop to this level would represent a correction of around 9%. Still, this is nothing serious and I’m pretty sure I would be suggesting a long position around this area if it were to happen.
Technical Analyst & Trader
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