The AlphaMind Blog: SP500 and the 1970s Redux Revisited.

I have noted on a couple of occasions this year how there has been a strong similarity between the bigger price action from the mid 1970s and the price action over the past few years. I have termed this as '1970s Redux', this has never been a key part of my viewpoints on the market, however it has formed part of the backdrop to my major views along with my own long-term trend following system, (which unlike the 50/200 moving average, cross did not give a sell signal this summer), together with my own analysis of longer-term trends and price action. In the wake of recent moves I have decided once again to check the progress of the market against the mid 1970s price action. The chart below shows the SP500 from the early to mid 1970s on the upper chart, with 2006 - 2010 on the lower chart. On the face of it, the most recent move up seems to have made a significant break higher above a key resistance line, I do have a slight reservation with regard to this line, which I will address in the next chart below, however it is hard to ignore the strong similarities and how well the two charts have been synchronised in the big picture. Of course as I always point out there are no guarantees this will continue, however I also believe that one should give it due consideration. One reason I particularly like this chart is that the economic environment of the mid 1970s was not too dissimilar to the current environment, not in the specifics but with regard to the fact that the mid 1970s was a time of intense economic uncertainty.

With regard to the concerns relating to the nature of the declining trendline on the above charts, the break up through the line in early 1976 saw a dramatic rally in the SP500. I am not altogether so sure we will see such a repeat this time: My reasoning for this is that the current line has only 2 prior touches on it, whereas the 1976 line had 4 prior touches. Technically that made the line in 1976 a much more significant area of resistance. However, that does not mean it won't happen, and I will elaborate on why I think something similar, though probably less dramatic, could occur. The 1970s chart produced one big line of resistance, whereas the current market has produced 2 lesser lines of resistance, the first line is highlighted below as a dotted line. - The first approach to this line was firmly rejected in Oct 2009, but was soon breached in Nov/Dec 2009, with a re-test in Jan/Feb this year. This re-test was crucial since it provided a key base level for 2010 (though it did suffer a minor breach in early July, this could not hold). - Now that the second resistance line has been breached, this could give this greater upside impetus in the coming months, in the same way that the one strong resistance line of 1976 was breached. I still do not expect the dramatic move of early Jan 1976, but I do not rule out a move of a similar magnitude perhaps occurring over a slightly longer period of time. It is also quite possible that before that occurs the SP500 could retest the trendline break (which could take it towards a broad range of roughly 1110-1135), with a failure to hold that line probably ruling out any further upside and bringing the risk of a full blown bear market back into play.

Just to add some more perspective to the bigger picture. In the wake of the January 1976 rally, the environment became much more challenging. The market spent most of 1976 meandering sideways, with a couple of short-term spikes higher, before falling away again in 1977. I could easily see that analogy continuing in the wake of a failure of further Fed action to revive the economy through 2011 - (See Chart Below) .