If you’re like me, you’ve been inundated by year-end reviews of the stock market. So, I thought I’d do something slightly different, and review the past century — all from the standpoint of a technical analyst and chartist.  Enjoy!

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When you stare at charts all day as I do, it’s easy to get caught up in the daily squiggles that, while presenting profitable trading opportunities, offer marginal insight into the big picture. So, today, we’ll take a step back and evaluate where the market has been and where it seems to be going from a charting standpoint.

We’ll start with the long-term S&P 500 channel.  As a fledgling broker starting out with Merrill Lynch years ago, I was drilled in the importance of remaining fully invested at all times.  If one had a long enough time frame, it made sense.  It made dramatically less sense, however, if one had a retirement or major expense at the same time as one of the many dramatic swoons in stocks.

The channel below is the best way to evaluate both the booms and swoons.  It was first created by the 1929-1932 crash, and established its bona fides with subsequent tags of its bottom in 1942, 1974 and 1982.We might have had another tag after the 2007-2009 crash (the red dot.)  But, central bank intervention was successful in stemming the tide and driving the index to new highs instead.  But, I’m getting ahead of myself.

The first key event following the 1929-32 crash was in 1944, when SPX broke out of the triangle it had been in since 1929.  From a charting standpoint, it was somewhat remarkable, as SPX had just completed a Head & Shoulders Pattern that suggested another leg down past 1932’s lows.

It was averted largely through massive inflation, which had averaged 0.006% in the previous 4 years.  It spiked to 11.3% in 1942 and averaged 7.8% through 1948 after peaking at 18.1% in 1947 (the highest since 1918 in the lead-up to the 1920-21 Depression.)

Using the 1942 lows and 1946 highs, SPX established a channel (below in red) within the channel that was able to finally drive the index past its 1929 highs in 1954.  But, the rise wasn’t without incident.

It dipped below the channel bottom in 1949, after completing a fractal of the 1934-1942 period.  This 1949 low would later go on to help establish a trend line (blue) of support for the 1970 bottom.  But, the red channel otherwise performed admirably, lifting SPX from 7.6 to 108.37 by 1968.

It finally broke down in the Summer of 1969, dropping through the larger channel’s .236 line that had provided a bounce in 1957 and 1962.  By May 26, 1970, SPX had fallen 36% from its Nov 1968 highs.

On May 27, 1970, President Nixon called 60 prominent business and financial leaders to the White House for a summit.  Though the details of that meeting remain sketchy, the S&P 500 soared 5% that day and a stunning 11% by the 29th.  SPX barely paused on its way, in April 1971, to a Fibonacci 88.6% retracement of its losses from 1968.  There, it gave back 13.4% before soaring up to just past the 1.272 extension.  It was January 1973, and the quadrupling of oil prices and since October 1972 and impending US dollar devaluation finally proved too much for the rally.

The subsequent sell-off was almost contained.  When SPX reached the blue trend line off the 1942 and 1949 lows, it bounced for a full 4 months.  It finally gave up in April 1974 on the back of soaring short-term rates rates and persistent inflation.  One-year treasury yields soared above 10-yrs (11.03% versus 6.99%) and inflation finished the year at 9.4%.

After dropping through the rising red channel, the 1932 channel’s .236 line, and the blue trend line, the next support wasn’t until the 1970 lows at 76.17.  SPX bounced there for about a week before plunging through to new lows and, ultimately, below the TL connecting the pronounced 1966 and 1970 lows (in red, below.)

Combined with the TL connecting the tops, it had produced a megaphone pattern, and the megaphone had just broken down.  The 48% drop from the 1973 highs was bad enough.  But, breaking down through this key support portended even deeper losses.

Fortunately for the market, the government was watching.  The inflation which had once again spurred the market to new nominal highs had proved its undoing.  President Ford released an economic stimulus program, complete with lapel pins featuring the slogan “Whip Inflation Now” on October 8.  More importantly, the Fed intervened to prop up the US dollar.It was enough.  SPX recovered back above the red TL and bounced sharply higher, reaching the 78.6% retracement in late 1976, the 1973 highs by February 1980, and, ultimately, the 1.272 extension in November 1980.  The fact that it took 7 years to return to 1973’s highs severely tested the buy-and-hold meme.

Having recently experienced a major tumble after reaching a 1.272 extension in 1973, SPX lost its footing once again.  The correction lasted almost two years and produced a 28% loss.  But, compared with the 73-74 crash, it was orderly; and, more importantly, it ended when it reached the bottom of the rising channel from 1932.

Although it wouldn’t take shape for years, SPX had begun construction of a new, rising channel, shown below in blue.  It’s a sloppy channel at best, as it started off very steeply (the red TL) and was interrupted by the 1987 flash crash (which is deserving of its own post one of these days.)

Ultimately, it carried SPX all the way from 101.44 in 2982 to 1552.87 in March 2000.  Along, the way, it surmounted the 1932 channel’s .236 line and its midline before running out of steam at its .786 line.This was the tech bubble, and it culminated in a PE ratio of 28.5 on S&P 500 earnings of $50.00 — up from 9.3X and $12.64 in 1982.  The bubble popped, of course.  In 2001, earnings fell by more than half to $24.69.  And, SPX shed over 50% on its way to 768.63 in October 2002.

The reality is it should have dropped to somewhere near 600.  Once the blue channel broke down, SPX plunged through the 1932 channel’s midline and that blue TL from 1942 — falling in a well-formed channel toward the 1932 channel’s .236 line (the blue dot.)

But, SPX bounced on the falling channel bottom in July and, once the bounce was finished in October, was buoyed by a FOMC rate cut (as well as BOE, ECB and BOJ cuts) and open discussion of lowering rates even further.

By May 2003, SPX had regained the 1942 trend line.  By December, it had pushed back above the 1932 channel midline.  And, by July 2007, it was testing the 2000 highs again — though a new bubble had been formed in the real estate and mortgage market.

When the bubble popped this time, it was good for a 57% crash.  As before, the blue TL and 1932 channel gave way in quick succession, the previous lows barely slowed the descent, and, further declines were prevented by aggressive central bank action.

The 2009 lows happened to line up with a TL off the 1998 and 2002 lows.  So, a megaphone pattern evocative of 1968-1974, was being formed.  It was less bullish insofar as the top of the pattern was rather flat and, thus, didn’t promise as much upside.  It did, however, hint at another leg down to tag the 1932 channel bottom as occurred in 1974.

As usual, central bankers had other ideas.  They not only continued lowering interest rates, but aggressively bought up financial assets by the trillions.  Some, like the BoJ and SNB continue to buy stocks directly, while the Fed, BoE and ECB prop them up indirectly by maintaining zero or negative interest rates and manipulating futures prices.  According to Ed Yardeni, central bank assets now exceed $15.6 trillion — more than 20% of all the world’s GDPs combined.

Following a 2010 melt-down that might have produced another leg down to the 1932 channel bottom, central bankers learned that a well-placed comment regarding QE was nearly as beneficial as the real thing.  Bernanke’s Aug 2010 Jackson Hole hint regarding additional QE proved to be true.  While, Bullard’s Oct 2014 hint was enough to send stocks to new all-time highs.

On May 22, 2015, SPX reached 2134, a mere 4 points shy of the 2138 upside target we placed on the index back in 2012 [see: The World According to Ben.]  We revisited the forecast in Dec 2013, when SPX reached 1823 [see: Butterfly Warning] and called the imminent top on May 20, 2015 [see: The Last Big Butterfly.]As the chart above shows, when SPX completed the Butterfly Pattern at the 1.618 extension last May, it also completed a backtest of the 1932 channel’s centerline.  The rising wedge that had formed since 2009 clearly broke down, and SPX has been plumbing new lows ever since.

But, if the last 100 years of charting shows us anything, it’s that the folks who run the Big Show won’t sit idly by as all the “work” they did over the past few decades comes undone.  The $16 trillion in central bank asset purchases, the countless overnight ramp jobs, the massive devaluation of the yen all served a purpose: to keep stocks on the rise.

So, rather than stock up on canned food and ammunition for the coming zombie apocalypse, I’ve focused my energy on figuring out the next spot at which The Powers That Be might decide they’ve had enough.

The first key is to recognize that every TL from the 2009 lows to any significant 2011-2015 low has been breached.  For a while, we could force an unbroken TL or rising channel on the chart.  No more.  The most bullish channel I can envision is the one shown below, which assumes the rise from mid-2009 through present day took place in the upper half of a larger rising channel — shown below in red.If this channel is legit, then we could justify support nearby at the channel midline — where it intersects with a TL off the 2007 highs.  Note that this TL is very nicely aligned with a neckline of a potential H&S Pattern that’s set up since early 2014.  I’ll call the target 1882-1887 for now, and it could happen as soon as tomorrow. Earlier today, SPX nearly reached an .886 retracement of the rise from 1871.91 on Sep 29.  But, Sep 29 itself overshot the .886 retrace of its rise from the Aug 24 lows at 1867 by 24 points.  It wouldn’t surprise me to see a sequel to that movie.  In fact, 24 points past the new .886 at 1899.79 is 1875 — a stone’s throw away from the target proffered above.If it happens to drop through 1871, then things get really interesting.  The completed H&S Pattern targets 1600 — a 13% drop from current prices and total of 25% from last May’s highs.  It would conceivably intersect with the bottom of the channel off the 2009 lows by August.  After that, things get truly ugly.

Will central bankers intervene before that happened?  Probably.   But, the BoJ has so far remained on the sidelines as the USDJPY continues to break support.  And, oil is still searching for a bottom.  It’s hard to imagine a serious bounce without one or the other of them recovering.

A couple of other charting thoughts — oddities, really, that might mean nothing.  The slope of the neckline shown above is exactly the same as a TL which connects the 2000 and 2015 tops.  And, if we construct a channel that features that TL as its top and the 2009 lows as its bottom, we see that the bottom of that channel runs right through the blue dot that would have made for a more logical 2003 low.

In an even greater leap of fancy, a placement of the channel bottom through the 1932 lows places the channel’s .786 line right on top of the red dot.  If you find yourself wondering what TPTB had in mind when they laid out the grand plan years ago, be careful.  You might just end up charting for a living some day.

stay tuned...