For those of us who like to watch chart patterns there is a very interesting (and worrisome) pattern developing in the S&P 500 – the dreaded triple top chart pattern.
As can be seen in the chart to the left, the S&P 500 is fast approaching a triple top pattern. The significance of such a pattern is that it can, at a certain point, indicate the future price trend of a security (in this case the S&P 500 Index).
On the chart we can see that the S&P 500 hit a high price of 1,553.11 on March 24th of 2000; it then plunged, moved sideways for awhile, tried to retest the high it made on the 24th and then began its long descent to a low of 768.65, which was set on October 10th of 2002.
The same pattern occurred in 2007 when, on October 11th, the index reached a high price of 1,576.09 and then plunged to a low of 666.79 (scary number – hey?), which was reached on March 9th of 2009. And, as one can imagine, these types of patterns are significant to investors because then could mean the difference between retiring comfortably or having to go out and look for a part-time job during one’s golden years.
Anyone savvy enough to have gotten into “the market” at some point during the lows, and then gotten out just before the bottom fell-out, did quite well, indeed. On the other hand, the poor fools that got in near the top and then rode the wave all the way down had to, without a doubt, suffer some major stress related issues – certainly, something all of us would wish to avoid.
And that is why the current pattern for the S&P 500 is important. Ominously, the latest pattern looks eerily similar to the patterns that were drawn during the years between 2000 to 2002 and 2007 to 2009. If the current pattern were to follow in the footsteps of its two predecessors, I would predict that, at some point in the next several months, the S&P will reverse its current trend and start heading lower. But, that is not to say that the pattern will follow the same trend.
If the S&P’s price can climb above the high that was reached on 10/11/2007 (i.e. 1,576.09) and comfortably stay above that price for a number of weeks, then we could see a brand new era in the current bull market, and in our overall economy.
If, however, the Index cannot break through the 1,576.09 price ceiling with some real conviction, then, sadly, we may be in for another rough patch, which, judging from recent historical records, could last up to two years or more. Major price moves (whether up or down) are, however, always preceded by an event trigger. In the case of recent events, I would suspect that such an event will have something to do with the ever growing U.S. debt problem. If our government officials can devise meaningful solutions to our current financial woes, then I would fully suspect that the S&P will break through the 1,576 mark. If not, then I’m afraid that we are in for more pain.
Either way, the pattern is worth watching – and it’s worth watching carefully. At this point I do not believe this is a time to jump into equities with total conviction. The more prudent thing to do would be to wait to see how the ongoing U.S. budget debate shakes-out in the next several months. Recently, Congress and the Senate passed legislation to suspend the debt limit, which will allow the government to borrow hundreds of billions of dollars more to pay its obligations. The measure effectively puts-off, until August of this year, the need to deal with the problem. At that point, I would suspect, that our elected officials will have to do something to address the issue(s) because I do not believe the bond market will be in any kind of mood to tolerate any further shenanigans. Stay tuned, though, because anything could happen – especially with our current set of leaderless leaders.
Note: Charts courtesy of optionsXpress
