Long term outlook
Posted by Danny on February 11, 2013
Markets have continued to push upwards, and are now testing all time highs.
With a few more lunar Green period days to go, we could be recording new highs in the next couple of days, but time is starting to run out.
Let’s have a look at the S&P 500 index (click for larger image):
The ceiling of the upper trendline is around 1530 for the moment. We may or may not reach that level this week, but I think there will be another attempt in our next lunar Green period in early March.
For now we should concentrate on the upcoming Red period. I would look for a setback to 1500 or just below it.
A drop below 1470 would indicate that we have seen the highs for a while.
So, I would take some profits by mid-week, then buy back if the S&P is still above 1470 by the end of February.
Notice how my Earl2 indicator is starting to turn down (red arrow). This indicator is often early, so it’s not a reason to panic immediately, but generally we have to be very careful (by keeping tighter stops) when the orange line crosses below the red line.
Now that the markets we cover have reached important upside targets, it is a good moment to take a look at the longer term picture. Here are some long term charts for the Nasdaq Composite index.
First a weekly chart, showing the most recent years (click for larger image):
Since the early 2009 bottom, the Nasdaq price action has been contained under a large arc formation, with multiple touches. This indicates a gradually weakening momentum. The arc formation converges around 3300 by the end of the year. This tells us that the 3200-3300 area is going to offer tough resistance. It also means that the market will probably make some important breakout, up or down, before the end of 2013.
Now, let’s take a look at the monthly chart (click for large image):
The price scale is logarithmic in this chart (log scale is better for very long term charts). The arc we saw in the weekly chart is now visible as the blue ellipse. Major trendlines put things into context.
In 2008 the Nasdaq broke below a trendline that was in effect since the 1974 lows (not visible on this chart). The market came back to touch that line in 2010, but has not been able to get back above it.
We can now see why the 3200-3300 level is so important.
We may be in a uptrend channel since the 2002 lows, or in a ongoing downtrend since the 2000 peaks, in both cases the ceiling is currently positioned at 3300.
The 3300 number can also be obtained in a few other ways.
In 2002, the Nasdaq bottomed at 1108. In 2009, a major low was found at 1265.5
A doubling from the 2002 bottom is 2216 (2 x 1108). That level proved major resistance in 2004 and 2005, when it took 4 attempts and almost 2 years to finally break above that barrier.
A tripling from the 2002 bottom would now give us 3324 (3 x 1108).
The top in 2007 was at 2861, which was a fibonacci 2.618 times the 1108 low.
The low in 2009 was at 1265.5. Applying the same ratio gives us 3313 (2.618 x 1265.5).
We can see how 3300 is popping up in a number of ways.
What to expect if this level continues to be a tough nut to crack?
Then we would probably get a couple of pullbacks before finally making it above that level.
Here is another monthly chart, now in linear scale (click for larger image):
We see how the price action since 2004 is nicely contained in parallel channels.
A failure to get above 3300 would probably send us back to the support line of the middle trend channel, which is around 2800. In a worse case scenario the bottom trend line will come into play, where support would appear around 2100 (which would be a retest of the 2010 lows).
Time will tell when the Nasdaq breaks above 3300, but until that happens these charts can help us navigate the market.