Long-Term Analysis Of The S&P500

March 17, 2016

A recent post on LinkeIn showed Technical Analysis of the S&P500 to alert readers to the risk that Wall Street could begin a long bear trend. This analysis was then posted there in support of that view, using the methodology based on preferred gradients in market prices. Briefly:

  • Preferred gradients appear as trend lines along which market prices tend to make trend reversals
  • There are many different such gradients and those that are parallel are mostly spaced according to certain mostly known ratios; 500:500 for even division of a ‘channel pair’, which consists of three parallel lines; 382:618 for the Fibonacci ratio and 400:600 and other similar round numbers
  • Different PGs are related to each other through the Fibonacci ratio

(This may sound much like voodoo! But then it must be easy to explain that the chart below is just coincidence, if you can!)

S&P500 Monthly close. 1977 - 2016

Only master gradient M is defined between two points on the chart and tangent to the lows. All other trend lines are derived from the gradient of line M through the use of the Fibonacci ratio (1.618034). The Trend table displays the values of the selected trend lines for the end of March – the actual difference between the February value (1903.03) and line T (1905.78) as at the end of February, is less than 0.15%. Not too bad all of 7 years after the origin of line T!

Observe that lines P, Q and R are generated from outright tops, while line T has its origin in a spike low. Line S is tangent to the top of the 2009/16 bull trend. It means all these rising trend lines are located at specific and unique points on the chart; they have not been ‘engineered’ or adjusted to deliver specific results!  That, combined with the channel ratios, below, validates the whole analysis.   

An analysis is finally validated by the channel ratios: these have to be either of the well known and frequently seen ratios, or there have to be two similar ratios that can validate each other. The trend lines also have to intersect at least one significant trend reversal to qualify.

The channel ratios relevant to this analysis are:

ABC: 485:515,  BCD: 500:500,  CDE: 491:509,  DEM: 485:515,  XYZ: 386:614

PQR:  472:528, QRS: 386:614,  RST: 258:714,   QRT: 472:528  

The ratios show that channel pairs ABC, and QRT have the same ratio. Pairs  BCD and CDE are either spot on or close to evenly divided and with the channel pairs ABC and DEM the same, it means channel ABCDEM is fully symmetrical.

Channel XYZ has the Fibonacci ratio, as does channel pair QRS. PQR and QRT also have the same ratio. Channel pair RST, accurately containing the post 2009 bull market, is an outlier, but line S fits the Fibonacci ratio in channel QRS.

Symmetrical channel PQRT is of interest. The SP500 closed on line T in February 2009 and at that point it may have been concluded that the SP500 could break lower, as fundamentals were very poor at the time. Instead, after the US Fed injected trillions of dollars into the financial system, the steep bull market took off, and, in doing so, maintained the same gradient that has been associated with rising trend for quite some time. The Fed’s timing was exquisite, having the SP500 reverse higher off support from the master line M, and starting the steep bull market in channel ST at just the right moment to fit the channel ratios!!

As the original article correctly speculated in February, the SP500 was destined for a rally; here as well, a reaction off support at line T during March was on the cards. The prospect for the longer term is however for a break below channel ST and most probably an extended bear market. The author of the original analysis had the equivalent of master trend line M as a potential target. That implies a 50% decline for the SP500 – sufficient to be of some concern for investors.

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