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Weekend Stock Market Analysis

(1/22/11)

Since I have received some inquiries regarding whether the S&P 500 can rise back to the late 2007 level here is the type of pattern that would likely pan out over the next year or so which is a "Broadening Top".   If this type of pattern is developing then the S&P 500 would eventually rally back above its previous 2007 high which was at 1576.    Currently the move up from the March 2009 low would be the final 5th Wave.   However keep in mind once this pattern completes then a large sell off or consolidation pattern would follow with potential retest of the longer term downward trend line.

Meanwhile a longer term chart of the S&P Composite is shown below.    Values before 1928 were based on research done by Robert Shiller who calculated monthly values for the S&P Composite going way back to 1871.    Notice there have been two other Broadening Top patterns during the past 140 years in the S&P Composite.    The first one was  in the early 1970's and the other in the early 1900's.    Notice once the Broadening Top pattern completed in the early 1970's a sharp 48% sell off followed.   Meanwhile the other Broadening Top pattern completed in the early 1900's (1912 to be exact) and was then followed by a choppy 9 year consolidation period through 1921 in which the S&P Composite lost 37% of its value over an extended period of time.   Thus it's not impossible that a repeat of one of these two past occurrences could happen again if the S&P does rise back to the late 2007 high within the next two years.   

Meanwhile a closer look at the Broadening Top pattern from the early 1970's shows the final 5th Wave acted like an "ABC" type affair. 

Now if a Broadening Top pattern is developing then the move from March 2009 to April of 2010 was likely  "A" of an "ABC" affair which was followed by "B" that corresponded to the July low.   Furthermore the recent move up from the July low 1011 would be the 1st Wave of a larger 5 Wave pattern for "C".   Meanwhile a Wave 2 pullback should develop soon with support coming in at or above the 61.8% Retrace around 1120 (calculated from 1011 to 1296).  This would then be followed by Wave's 3, 4 and 5 to complete the pattern just above the 2007 high of 1576 probably around 1600 or so.   Naturally this would be bullish over the next year or two but then turn bearish in the longer term as a potential retest of the longer term downward trend line would eventually occur after 2015.

Finally also notice the longer term upward trend line in the S&P Composite (green line) would eventually intersect with the current downward trend line (black line) as well at point A?   

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