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Tuesday 21 January 2014

Brave New World Series: 5 - A Pattern Projection into 2016-8

This is the fifth post in my Brave New World Series (BNW Series) since SPX broke over major long term resistance under 1600 in April 2013. The thrust of this series is to argue first that the break confirmed the end of the secular bear market that began in 2000, and to look at where equities, particularly SPX, are likely to go from that break.

There will be at least two more in this series after this one, at least one of which will look at bonds. These take quite a bit of work to put together, apart from this one which is mainly pulling together elements from the first four in the series posted May to July 2013, so I'd expect to produce these as and when I can over the next few months. The previous posts in this series can be found through the links below:

Brave New World Series 1 - Secular Cycles
Brave New World Series 2 - Fleas and Fibonaccis
Brave New World Series 3 - The Rising Wedge Target at 1965
Brave New World Series 4 - The Next Big Resistance Levels

In the first in this series I was looking at secular cycles on SPX, arguing that the secular bear markets from 1929 and 1965 had seen both the high and low made within a single cyclical bear market and that each had formed a pattern or resistance trendline from the start of the secular bear market period that broke up to signal the end of that secular bear market period.

From there I argued that the third secular bear market on SPX had started in 2000, that the single cyclical bear market that saw both the high and low of the secular bear market period was 2007-9, and that the secular bear market pattern, in this case a right angled and descending broadening formation (BFRAD) broke up in April 2013 to signal that the secular bear market was over.

I also noted that the two secular bull markets 1943-65 and 1980-2000 lasted about twenty years and saw rises from the lows of 2667% and 2485% respectively, and if that were again to be the case in this new secular bull market, then we could expect it to end on SPX in the 2033-5 period in a 16,650 - 17,750 range.

I'm just mentioning these historical comparisons now to emphasize that in terms of these the targets I am talking about today are small, and smaller still even compared to the gains made so far since the 2009 low. I would note again though that a sample size of two (secular bear markets) is not enough to be relied upon statistically, and that for those prepared to wait, a much more statistically  reliable analysis should be available in a thousand years or so when there is a much larger sample of secular bull and bear markets to consider.

On the quarterly chart from 1923 I show the patterns for the secular bull and bear markets from then to date, and the broadening formation that started to form at the start of this most recent secular bear market in 2000, and broke up in April 2013. SPX Quarterly Lifetime chart:
In the third post in this series I looked at the 1965 target from the rising wedge on SPX (LOG chart) from the October 2011 low that also broke up in April 2013, and I have sketched in a possible path for SPX over the next few years. That path would be to make the rising wedge target in the 1965 area, with a high window in the 1950-2000 range, then a decline to retest broken broadening formation resistance at the 2000 and 2007 highs, and then a move up to the broadening formation target in the 2440 area and possibly beyond. I'd be expecting the 1965 hit at the Spring high this year, the retest of the 2000 and 2007 highs in late 2014 or sometime in 2015, then a move up to the 2440 area target to be hit sometime in the 2016-8 period. SPX Weekly (LOG) chart:
In terms of patterns formed since the March 2009 low, on the LOG chart above I have a tentative rising wedge. I would rely more however on the analog charts for shorter term patterns and there I have the current pattern as most likely being a rising channel from the November 2012 low. That channel resistance would be a good fit with my 1965 wedge target. SPX weekly chart:
Moving back to the short term SPX may have put in a retracement low on Friday at the test of the daily middle bollinger band. If so I'd be doubtful about the prospects for the likely large opening gap up today being filled. SPX daily chart:
ES has already broken declining resistance and over the last short term high overnight and the overnight low was at the hourly middle bollinger band. I'll be looking for support there this morning and that's currently at 1838 ES, and the hourly 50 MA is also significant support in the 1836.75 area. If the retracement low is in then I would expect the support range between those two to hold on any test (hourly close basis). ES 60min chart:
If the short term retracement low was put in on Friday then I'd now be looking for a strong move towards SPX rising channel resistance, currently in the 1910 area, and ultimately my 1965 wedge target. If so then shorts will be scalps only for a few weeks from here.

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