The Big Picture: May 4, 2021

In a presentation to the CFA Society in July 2019, I showed the following chart which seemed to capture the Fibonacci and channel picture quite well. SPX was nearing the top of a large channel dating back to 1986 as well as the 2.618 Fibonacci extension of its 2007-2009 crash. It was an excellent setup for a correction.

SPX had reacted at the top of the channel three times in the past two years: an 11.8% drop in Jan-Feb 2018, a 20.2% plunge in Sep-Dec 2018, and a 6.8% slide in Jul-Aug 2019. None of the corrections bounced at traditional support, and all rebounded to slightly higher highs within 3-7 months.

It made sense, therefore, that SPX would react more significantly upon finally reached the 2.618 extention at 3047.23. The most logical target after reversing would be the next lower fib level at 2703.62 and, if that failed, the 1.618 at 2138.04 (it was never properly backtested.)

If 2138 failed, then the charts suggested the possibility of a backtest of the October 2007 highs at 1576 when the yellow channel midline reached it in 2022. Instead of reversing, SPX leapfrogged 3047 in November and didn’t look back until February when it plummeted by 35.4%, just missing a backtest (better late than never) of the 1.618 Fib at 2138.At that point the Treasury and the Fed got involved and the rest, as they say, is history.

With chart patterns and technical analysis, it’s often quite useful to go back and look at past patterns. Much can be learned about why things happened and how past patterns could repeat.

This morning, for instance, it appears we’re finally going to get a backtest of the most recent Fib level to have been leapfrogged. Better late than never.