S&P 500 at Critical Level: Part 2

November 19th, 2012

by Dominic Cimino

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In my article last week I pointed out that the S&P 500 Index is at Critical Level. Today I present a follow-up to that article in which I share my longer-term observations. I mentioned previously that the 1350 level was a critically important one for the S&P 500 Index in the intermediate term. The chart below represents longer-term observations that will hopefully enhance your overall market understanding, and perhaps bring to light some interesting questions.

My observations on this chart:

  1. The most glaring observation is the propensity of the market to trend in channel formations. This can be an extremely useful tool and is probably a guarded secret among professional traders who utilize technical analysis. Also, notice the tendency for subsequent channels to have very similar slope trajectories to their predecessors. For instance, the rallies of 1994-2000, 2003-2007, and 2009-present clearly have near identical slopes.
  2. The recent exception to channel formation was the 2008-March 2009 break, which was so large and happened so quickly, that channel formation was impossible.
  3. N.B. If the 1350 area of support that I previously presented doesn't hold presently, the next major channel trend-line support at the current trajectory is the now famous 1260 level. Do you recall all of the previous attention to the 1260 level in recent years? If you do a web search on it, you will find numerous articles speaking of its technical significance during previous periods. Will this critical area act as a magnet support test? Only time will tell.
  4. Additionally, notice how during the current bullish trend-channel, the two most recent significant market highs have been placed well short of the well-defined upper channel line – a condition that is often a harbinger for a change in trend.
  5. The two thick red lines represent the MAJOR support and resistance levels for the market.
    1. The upper one represents the MAJOR resistance at the all-time highs in the market.
    2. The lower upward sloping one represents the MAJOR long-term trend-line support dating back to the inception of the last secular bull market of 1982-2000. Notice how the break of 2008-2009 stopped right at this line!
  6. Finally, notice how from left to right the width of the first three channels are very similar to each other, and then notice that the width of the current channel is significantly wider. I view this as being indicative of the fact that we are now in a potentially more volatile period, if you can believe that. Granted, the first three channels represented substantial moves with extreme volatility. But then came 2008-2009, when volatility was so extreme that channel formation was impossible (notice the extreme downward slope as depicted by the green line drawn from peak to trough); and 2008-2009 has been followed by this present cyclical market rally, during which the market corrected from May thru October of 2011, and therein defined a channel that was wider than previous ones, thereby confirming a market that remained potentially more volatile. The fundamental side of the market, with its sovereign debt crisis, would certainly back this claim.

Dominic Cimino

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Preferred planning concepts, LLC & Cambridge are not affiliated.

© 2012, Dominic Cimino of Preferred Planning Concepts, LLC (You can explore the services offered by Preferred Planning Concepts by viewing us on our website at www.ppcplanning.com) Any redistribution, reprinting, or reference to this chart or content is allowed so long as reference to the author and source is acknowledged.

Important Disclosures

Please be aware that this is not a recommendation to purchase or sell any security. This is not a recommendation for any individual or institution to alter their portfolio holdings. Every individual or institution has its own risk tolerance and investment objectives and perspectives.

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Any indices mentioned are unmanaged and cannot be invested in directly.

It must here be mentioned that technical analysis offers no guarantees of future price movements. Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain.

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