Tuesday, March 3, 2009

Anything Is Possible

I happened to be looking at a monthly chart of the S&P500 the other night to get some perspective. See figure 1, a monthly chart of the S&P500.

Figure 1. S&P500/ monthly


My first thought was "oh my god" as the S&P500 closed below the September, 2002 low pivot. (See the yellow half oval in figure 1.) Could it be - a mega "M" type top? Using classical technical analysis, a break down of such a magnitude implies a price projection of 200 on the S&P500. Yikes!

Here is the math. The width of the base is approximately 600 S&P500 points. You take the break down point (~ 800 on the S&P500) minus the width of the base, and this yields a price projection of 200.

Seems improbable. But of course anything is possible.

Then I came across this video of Louise Yamada of Louise Yamada Technical Research Advisors who discusses the significance of this technical break, and she even suggests (forecasts?) that the S&P500 could reach 400. Wowser!







But what is interesting about Yamada's comments is not the technical "call" but the fact that she speaks about a "wealth destruction phase" that would be very similar to the early 1930's. My point here isn't to be an alarmist, but such projections really are scary. If they come to fruition, they will likely have important implications for all of us.

7 comments:

Anonymous said...

Thanks for this chart, Louise's take, and your commentary... Yikes is right !

Guy M. Lerner said...

You are welcome....of course, if this doomsday scenario comes to pass it won't be a straight shot; this is still a bear market and there are few reasons to believe that any multi week bounce will be anything but a countertrend rally. This market needs time to heal itself.

UrbaneGorilla said...

I saw Louise on CNBC's 'Fast Money with the DOW at 11,000 (I believe) When she mentioned DOW 8000, they all chuckled. Sure was interesting to see the more serious looks on their faces this week when she guest appeared.

I read the book she wrote explaining the technical and fundamental reasons behind her DOW 14000 call. Ms. Yamada is so meticulous and particularly scary.

Thanks for the article.

jegan

rosesryellow2 said...

Guy,

Always good to get the technical take. I've seen reports from investors who I respect who have said this market hasn't even started going down yet in the long term.

That is not to say there wont be very large snap back rallies.

BTW I was wondering where you got the charts on smart and dumb money?
Very interesting for sure...........

don said...

I've been watching that M for a while now and while it is rather ominous, I ran across this chart today that offers an interesting alternative: http://www.tradersnarrative.com/inflation-adjusted-chart-of-sp-500-2328.html

Adjusted for inflation, the index doesn't look nearly so bad. Time will tell I guess.

Guy M. Lerner said...

Rosesryellow2: I use TradeStation and I import the data; the indicator is no holy grail and as we are likely coming into a bull signal on the "dumb money" indicator, I will have an article out on the "best" time to buy; this will put some context to the indicator.

UrbaneGorilla: that is a great picture!!

Guy M. Lerner said...

Don: Thanks; that is a good chart