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) .

Anyway  on that note bid you all a great weekend...

However, before I go 'Something for the Weekend '. - Stones -- Pure Classic, enjoy.






 

Rates Update + SP500 may be getting ready for break higher.

Global Rates

The past couple of weeks have seen some very sharp corrective activity on Rates markets. This corrective phase has occurred in the face of very sharp drops in Government Bond yields over the past few weeks and indeed months. There have been a number of events which have helped contribute to the large drop in yields over the summer, chief amongst these have been 'Flight to Safety' fears regarding the Euro Periphery (PIIGS), Double Dip fears as US economic data disappointed over recent months, poor economic data in other G7 countries, and the increasing belief that Central Banks were going to increase Quantitative Easing in response to fears of further economic pain.  - Is this the beginning of a real turn in the rate environment or a mere correction? - Personally I think this is too early to come to any firm conclusion, however it is something I am going to try and focus on over the next few days and weeks as this is likely to be a barometer of the level of fear and/or confidence running through the global economic environment.

My initial feeling is that this is a correction in rates for now, which probably still has further room to run. - Regarding the issues above, the PIIGS issue has not gone away, Credit Default Swap (CDS) levels remain elevated, though price levels have eased a touch over the past few days. Double Dip fears have eased slightly in the face of marginally better data over the past couple of weeks, (but still remain elevated), stock markets have recovered there poise and QE2 has not yet materialised, though it remains a very strong possibility. - The charts below show US 2 year and 10 year yields, German, Japanese and Australian 10 year yields. --- I have highlighted the Japanese 10 year yield level of 1.20%, this has been a pivotal level for the past few years, the recent collapse in yields across the G7 really accelerated upon the confirmed breakdown through 1.20% in June, and the rebound of the past couple of weeks in JGB yields moved from 0.90% to 1.20% before easing back to current levels around 1.6%

SP500 Index

Last Thursday's 'Shooting Star' candle failed to turn the markets down, with futures levels currently suggesting cash trading around 1118/19, it would appear that this signal is a fail. Unless today's likely stronger opening turns round to produce a weak losing close, then the focus is likely to switch back towards the 1130/32 key resistance area from June and early August.

The chart below shows the patterns which I think are likely to have the greatest influence on the market going forward. I believe the market may be preparing for a breakout higher, I have listed below my reasons for this below. However, as long as the 1130/32 continues to offer strong resistance, and until we see a clear and sustained break over this level, the risk of further consolidation or a move lower remains a possibility.   

Clues as to why a breakout higher may be due soon :

1) The large 'Falling-Wedge' pattern (highlighted above): I covered this many times over the past couple of months, including this posting from the 2nd August (Click here). I am re-posting some work I have done on 'Falling Wedge' patterns below.

 

I have long favoured that we have a Type 2 pattern (as per the above), though I have had doubts, which have led me to question that we may actually have a Type 3.  However the re-test of the breakout, which has held well, does lead me to once again think that this is a Type 2 pattern, which has bullish connotations whereas a Type 3 has a very bearish connotation. - Note: Type 2 patterns usually morph from failed Head + Shoulder pattern, which in its own right is a Bullish pattern.

2) The Higher Low (highlighted in above chart) is another supportive factor.

3) The internal 'Inverted Head + Shoulders' pattern. - I am loathe to actually call this a true 'Inverted Head & Shoulder pattern' as these would normally occur at the end of a sustained trend, however when combined with other signals, these can act as continuation patterns.

4) My own Long-Term trend following system remains in Bullish posture, it failed to produce a sell signal on the May/June sell-off. I posted a blog on this a couple of months ago (can be seen here). This system is not a forward looking system, hence I do not consider it as a trading signal, however it should not be ignored either.

5) 1970's redux. I posted about this in July, the price action since then has actually re-enforced this even further.  Below is an updated chart of the near-term comparisons, note history does not repeat itself, but it does rhyme.  (Click on the Highlighted link at start of this paragraph to see full item for bigger picture).

6) AUDJPY -- This has been one of my main risk barometers over recent months. I have previously highlighted the Symmetrical Triangle on this FX cross. The price appears to be breaking out of the top of the pattern (see chart below), if this is maintained, this would be bullish for the AUDJPY, who's moves have been well correlated with moves with the SP500 over the past couple of years.

Of course, all this will be 'by the by' if the SP500 fails to clear 1130/32, or makes a short-false break. In the meantime, I would not be surprised if selling pressure was to emerge ahead to this key area.