Thoughts on the S&P500.

Trading the SP500 has largely been frustrating this year, unless you've playing a strategy of selling rallies to 1340-1370, and buying dips to 1250-1260 (well done if yo have , you will be in a tiny minority). - This week has seen frustrating price action and the index closing pretty much mid-range.

The following is my views and thoughts based of some technical analysis of mine, some opinions I have formed in recent years, and reading some of my favourite blogs and commentators.

First I want to start with a couple of patterns I see forming on the chart. - I sense two opposing patterns may be forming. I have no idea whether they will become completed patterns or not, and must accept there is a risk that I am extrapolating completed patterns from partially formed patterns, which is always a risky practice.

The two patterns I am seeing are a Bearish Triple Top, and a Bullish Cup and Handle. - Whislt I appreciate that until neither is fully formed, there are risks in labeling these. However I have done so for now...- Though I am tempted to favour the bearish pattern, because of my underlying longer-term bearish view, I actually feel that the Bullish Cup & Handle pattern may take precedence for now.  - There is a strong risk too, that these cancel eachother out, and we continue in a meandering sideways pattern for some time.

Before I bring help from the respected bloggers and commentators I follow, a quick look back at something I have been following for a couple of years. I call it the 1970s 'redux' (An earlier version of it can be seen on a posting from last October here_).

The top chart of the three is SP500 weekly 2007 - 2011. - The second chart is SP500 1972-1977.  I hope it is apparent how similar these are on the face of it. - The third chart shows the position of the 1972-1977 market within the slightly wider context.

On a micro level, I am not really keen to overly compare price action, and there are risks in that at some point the similarities will end, but overall I think the likeness is uncanny. - If the similarities do however continue, we are likely to remain in an extended sideways pattern, with some possible moves higher, which are quickly rejected, before eventually moving lower through 2012 or 2013.

Now for the cavalry. - Or at least the opinions of a few other parties that I respect. 

First Doug Kass. - Not so much a blog, as a serious of predictions and comments... - This guy has been incredibly brilliant and perceptive over the years.... This year he has been mostly predicting sideways action with this being neither good for Bulls or Bears -  so far pretty spot-on..Going forward he expects this may  carry on through the year.....  I also hold this recent comment as a good predictor of what lies ahead in coming years: "Investors will soon recognize that correcting our structural issues requires time and patience. When they finally do, share prices and valuations will be lower than they are today"    - So markets perhaps not running one way or another anytime soon. --- But continuing to range... - Which does not suggest my bearish scenario is on track - at least yet,, but is something for the future....(Sounds a lot like the late 1970s).

Second. - From an excellent blog I read called 'The Trend'. The guy behind this manages a system, which only he knows and understands, he incorporates the signals in with his bigger picture views. It is worth however looking at his bigger picture macro calls... Having read him for a number of years, I have gained a lot of respect for his macro calls, which he tends to offer as probabilities rather than certainties. --- His view for sometime has been of market decline eventually after a continued bull run,,, with the decline probably over  2012-2013.   (Perhaps in-line with Kass's comment above). Near-term, he is seeing all this action as part of the topping pattern ahead of that, and he has just started building into a long-term short position,, but ideally would like to get more of it on from higher levels..Shorter-term he favours a possibility of a new market high,, perhaps above 1370 sometime in next couple of months and maybe into the 1400s,,, Though I think he is prepared for it to take a few months, he does also consider a low possibility that May's high was it.

Third - 'Trade Your Way Out'. I have been watching this site,, since well before it was a subscription service. (The views are based on Elliot Wave)..., I have been really impressed with the calls over the past couple of years, and the ability to change track and opinion.  - Though I currently disagree with his view of a possible bull market to 1600+ over next few years, who knows perhaps he'll be right... (We are currently 1320 and this time last year we were in the 1000-1100 zone). - In the shorter-term he is currently looking for a run up to the high 1400s, perhaps 1480  before major corrective action. (My Cup and Handle would target close to that level).  

For your interest, last year TYWO turned Bearish in Q2 2010,, then when the Flash crash occurred, he revised his view to bullish looking for 1300/1400 - So was spot on there. In late 2010 he predicted a bear market for 2011 (back down to 666) after an early rally through March 2011. In April podcast (Which can be seen) he said this is a final rally with a target from 1350-1450, which will end the run from Mar 2009... -  However, his latest podcasts have usurped this and calls for the higher levels to 1600+ over the next couple of years ahead... So he has since had a change of thought, It will be interesting to see if he keeps this or revises this again. - .

Fourth - Price action from my somewhat speculative AUD pattern,which I highlighted on my blog in May. I was looking at a top in place, or the start of a topping process, with a new high still to come... I think price action since now favours new highs still ahead,, possibly above 1.12. (If however 1.0400 breaks and holds the break , then I may have to revise this), I still fear an eventual break back down to well below par,, but that may be well ahead in 2012 sometime. - AUDUSD and US Stocks have of course been highly correlated in past few years.,

Fifth.... I was witness to an excellent presentation last week from my old friend Dave Sneddon - Head of Technical Analysis at Credit Suisse. ---- A very quick snapshot : He charts 'global risk appetite.' .. -Currently it is as expected well in oversold territory... and whilst it may stay here, they are seeing a possible buy signal...It is not always as simple to translate this direct to US stock, it may be bullish for stocks,,, though they can not confirm this yet,, and it may be that it means bullish for emerging v G7. - Remember , its only an indicator,, and it is a probabilty call. - But it is something to watch out for.


-- I put this all together

• My current chart on SP500, sees both Bullish and Bearish patterns forming. For numbe rof reasons I favour the bullish resumption short-term, though there is risk of further sideways range.
• My 1970s redux, supports the idea of either further sideways, or upside but quickly rejected and back into fruther sideways, before eventually moving lower.
• Doug Kass - We continue to range wildly - Eventually when it hits home -Stocks will be much lower.
• The Trend - Starting to build into a major short position for ugly 2012/13, though thinks and hopes may get much of the short on over next few months at better levels. (So short-term bullish , long-term bearish) 
• Trade Your Way Out - Was bearish, now Bullish for move over 1400, maybe to 1480.   Bigger picture turned from bear to bull.
• My AUD - I hold out a (highly speculative) longer term bearish view, but think there is good possibility of new highs ahead in coming months...AUD and SP500 well correlated.
• CS Techs - Possibly signalling Bullish for risk in next few months, this may favour a bullish resumption for stocks in next few months, but is open to interpretation.

If I try and put this together,,, It suggest that we may have some upside surprise over the summer on risk,,, but will probably not last through 2nd half of the year...  before turning bearish into 2012,,,

Finally , no fundamental viewpoints here, these are way to complex... If I was to sum it up, I see high risk of deflation and depression still, but Fed efforts to overwhelm this by reflating could mitigate this, as it has done so far.....- the big question is whether sovereign debt issues can be inflated away on the long-term or not, or will completely undermine all reflation efforts eventually... - Who knows... --- And could that merely be the seeds of the next crisis??? - Far too complex for me !!!