(Editor’s Note – just to be clear, the post below is written by TNRevolution, not me!- Tim)
No, that wasn’t a typo.
If you frequent the comments section on the Slope, you’ve undoubtedly noticed a change in my viewpoint on the markets over the past couple weeks. Let’s take a look at why.
Starting with the Russell 2000, the market has seen multiple genuine opportunities to see significant weakness this year. They have all failed to this point. I have circled each opportunity on the chart below. Beginning with the drop in January of this year, the Russell broke down out of it’s rising wedge off the November 2012 low. This was a well formed wedge. We saw an initial drop down to the 1080 level, followed by a move higher to new highs and a backtest of the wedge. After the backtest, the Russell began to fall away again, leading to another good bearish opportunity. The decline again stalled at the 1080 level, moving higher, thereby making 1080 a key support level on the Russell. The final good bearish opportunity came in September of this year, as the Russell broke down out of its larger rising wedge off the 2009 low. This breakdown was also followed by a breakdown of the 1080 level. Prices stayed below 1080 for over a week, reaching a low of 1040. However, prices began to move higher, and retook the 1080 level, continuing higher since.
Once the Russell retook the 1080 level in October of this year, the bear inside of me knew something was up. As the saying goes, if the expected outcome of a pattern fails, expect a sharp move in the opposite direction. We’ve got two large patterns that have failed to be bearish: The large rising wedge off the 2009 low, and the breakdown of the 1080 area on the Russell after nearly a year of consolidation.
A sharp move in the other direction is exactly what we’ve got. In fact, it has been the most persistent rise in the market’s history, judging by the number of days SPX has traded above it’s 5 day moving average. The previous record for this metric was in 1928. What did the market look like at that time? I’m glad you asked!
The above chart is the $DJI from 1919-1930. The area shaded in purple was the rally in question. As you can see, it turned out to be a key level. After a brief pullback to retest its breakout of the 200 level, the Dow went into the heat of the final parabolic fervor of 1928-1929. Also of note, all the gains seen after this breakout level were completely erased in the crash of 1929.
So where does that leave us today? Below is a daily chart of $SPX. I would suggest unless we see the start of a powerful decline under the 2020 breakout level, it would be appropriate to focus on the long side for the forseeable future. The daily chart has pushed back up to the top of the rising wedge off the 2009 low, accompanied by an overbought stochastic and negative MACD divergence. I would expect a bit of a pullback at some point in the first half of December based off of that, but most likely not a very sharp one. From the bullish perspective, and ideal pullback would take us back down to retest the 2020 breakout level. If we are able to successfully test that level, and then move higher, it will set the stage for a potential very large move higher in 2015. If the rising wedge on SPX off the 2009 indeed fails to breakdown, I expect a big move in the opposite direction. A parabolic 2015?