Stocks: About To Collapse Or Rally To All-Time Highs?

It really is as black-and-white for stock markets: stocks will either collapse in a 2008-alike fashion or shine soon at all-time highs, at least that is what our data points are telling us. Let’s review our key indicators in order to forecast which scenario is playing out right now.

The first chart is the daily of the S&P 500 (SPY), the bellwether among U.S. stocks. The chart reveals nothing shocking, as this chart pattern is obvious to any investor: the 1850 level was tested several times, and the down-sloping trendline is about to get restested. We observe a triangle pattern, with resistance at 2000 points and support around 1850 points. Since 1.5 year the S&P 500 is moving in that channel, and it is ripe to choose a direction (the latest in two months).

The daily chart did not reveal much useful insights about future direction, so we turn to the weekly. Readers know that we only have one technical indicator in our methodology, being the 90 week moving average, which determines the long term trend. The next chart (lower pane) shows how the 90 WMA was structurally breached only twice in the last four decades. Especially in 2008, the S&P 500 retested its 90 WMA unsuccessfully, before starting the big collapse. Note how today we are very close to a retest of the 90 WMA.

The weekly chart reveals that we are at a make-or-break level, and it basically confirms the message from the daily. That does not happen often, so we consider this price level of huge (secular) importance.

To get a clue of future price direction, we have to dig deeper than the price charts.

One method to understand whether we are in a 2008-style scenario is to apply correlation analysis. According to Sentimentrader, if we focus on the past six months, then the time period from February to August 2008 is a close match, with an 84% correlation to the six months from last September through today. That’s the 2nd-highest correlation among any six-month period since 1928.