This is the third in a four part series of blog posts here addressing the current trend status of the S&P 500 on four different timeframes.  See the previous three.  This one addresses the long term timeframe, as displayed on a monthly bars chart.

The Chart

This is an EquiVolume chart, meaning each price bar is a rectangle, or “box”, whose top is at the high price of the month, bottom at the low, and whose width is proportional to the volume traded during that month.  Thus, the horizontal axis is linear in cumulative volume, not time.  This type of charting was first popularized by Richard W. Arms Jr. in his 1971 book, “Profits in Volume”.  The Midas methodology is best viewed on this kind of chart.  This chart is of monthly boxes from 1994 to the end of last week.  The price data are from Reuters and the volume data from Yahoo Finance.

Two Symmetric Manias

This chart shows the two recent market manias, the dot com boom peaking in 2000 and the credit crisis bubble topping in ‘07.  Notice the symmetry of each bubble – the horizontal width of the rise into the top is about equal to that of the fall from it.  You wouldn’t see this on a traditional time-based chart.  This tells us that about the same amount of trading volume happened on the crashing downside as there was on the manic build-up side.  And it makes sense when you think about it; all of those manic momentum players who chased each bubble to its top have to get washed out of the market on the downside before the market can stop falling.  And once they’re gone, the market can recover.  An EquiVolume chart is a quick and easy way to keep track of these kinds of things.

The Retracements After The Crashes

In 2003, after the dot com crash ended, price launched into an accelerated uptrend traced by that TopFinder, marked TF1.  One month after that ended, at the red arrow, price banged up into ‘Old R1″, the Primary R1 Midas resistance curve launched from the 2000 top, and then price went into an 8-month long bull flag consolidation, after which a new uptrend took it to the top of the next mania.

Now, onto the next mania.  In March of 2009, the crash from the bursting of the credit bubble ended, having been perfectly tracked down by that BottomFinder, BF.  Then, a robust retracement uptrend started, being tracked by the TopFinder TF2, which is now 85% complete.  But this time, price has hit R1 before the TopFinder has ended.  And so far, price has not broken above that level.  The dotted vertical line on the right is the projected horizontal location of the end of TF2.

The Current Status

TF2 is telling us that this uptrend still has 15% more to go (in cumulative volume, not price).  Another indication that we’re not at the end of this uptrend comes from the top pane, the MFI index (see my Feb. 6th blog post for description of this oscillator).  At each of the two mania peaks, the MFI was diverging down after having become strongly overbought.  And in 2003, when TF1 ended, the MFI was strongly overbought.  But as of now, MFI is not yet overbought, an indication that this current strong uptrend may not be at its top.

The current uptrend has spawned a two-fold hierarchy of Midas support curves, green, S1 and S2.  We can’t say for certain that the current uptrend has ended unless and until price breaks down below S2 (or below a new S3 if there is another leg up to this uptrend).

What Next?

The current uptrend on this timeframe is not over.  The only question is whether price will break up above R1 before the uptrend ends.  If it does, a reasonable upside target would be the Old R1 curve, at the horizontal location of the dotted vertical line.  Another scenario is that price will meander around just under R1 until the TF2 runs out.  In either case, there is no predictability as to what happens after the trend ends.

Will we go on to another mania peak, or have we, as a society, finally learned our lesson?  Such a question is beyond the scope of this blog post.

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