Echos of the Past

 | Feb 14, 2013 | 7:30 AM EST
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A slew of readers have been asking whether I think the S&P 500 has a triple-top formation in this 1500 area. Well, in Technical Analysis of Stock Trends -- what I refer to as the Bible of technical analysis -- Robert Edwards and John Magee note how rare triple tops are. More important, they also note that confirmation of the pattern necessitates a break in the valley below.

Yes, folks, that valley is all the way back at 660. Come on now -- breaking 660 would essentially mean going to zero, and even the most bearish of bears doesn't really think that will happen, do they? So here's a memo to anyone calling this a triple top: If it really is one by Edwards and Magee's definition, we have a lot more to fret over than just this issue alone. Another possibility, of course, is that it's merely a resistance area.

Now let's address the bulls' question of whether this move above 1500 means the start of a brand new bull market. Well, consider that the S&P has now been stuck between 650 and 1500 for more than a decade -- next month will mark 13 years since it visited 1500 for the first time. Looking back to the 1970s, the Dow reached 1000 in 1968 and could not definitively push past that level for 16 years, until 1984 (after a brief breach a year earlier).

So I have compared these two periods, though I decided to look at the S&P rather than the Dow. I did not calculate any of the following in terms of time or price -- or percentage -- but, rather, the general swings of the market.

S&P 500 -- 1968-1984

S&P 500 -- 1998-2013

Point A marks the index's first trip to the highs in 1968, as well as its first visit to 1500 in the year 2000. Then, in each period, we saw a bear market that took us to point B -- followed by a rally to a higher high, or point C on both charts. In the 1970s that led to the two-year bear market, from January 1973 to December 1974 low (point D) -- quite similar to the roughly two-year decline from 2007 to 2009. The rally in the 1970s -- point E -- took the market to a lower high before it headed down again to point F, which I've deemed analogous to the spring and summer of 2011.

Now comes the test: On the 1970s chart, point G is a higher high that led to about a two-year bear market, with a nearly 40% decline to point H. In the current market, such a higher high would mean a move above 1570 -- a rally the current market has not yet achieved.

If you believe the last 13 years have been a big setup similar to what we saw in the 1970s, this is your template. Bulls should keep points G and H in mind, while bears should keep focused on when the high at point G may appear.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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