Looking Backward

The end of the year is a time for big thoughts. It doesn't get much bigger than the 20-year monthly chart. How did we get to where we are today?

At this level of resolution, 2011 was a year a no drama, a mere blip, an after-thought to a failled attempt to put the Crash of 2008 to rest.

The trading day still has three hours plus change to go as I write this, and I suppose something dramatic could happen between now and then, especially when I consider that the major financial houses this week are being run by frisbee-throwing barbarian interns whose senior managers and mentors are all on holiday vacation.

But, assuming that nascent adult impulses win out in the halls of moneyed power, here is a look at the broad sweep of market history.

Saturday morning's newspapers will make much of whether the market ended the year up a bit or down a sliver, none of which really holds significance.

What counts is that the market recovery failed, and in failing created potential for a significant decline in 2012.

To get technical for a minute...

The S&P 500 index fell from its high of 1576 in October 2007 down to 667 in March 2009, had recovered by 78.8% (a Fibonacci retracement level) by May 2011, and then fell again, by a Fobonacci 38.2% of the failed recovery, before bouncing ot its present level, near the 23.6% retracement level.

Put more simply, the S&P 500 fell sharply in 2008, recovered 3/4ths of that loss in 2009 and 2010, and then in 2011 lost more than a third of what it had recovered, before gaining a bit of that back for a loss this year of about a fifth or so from the previous swing high.

By setting a lower high, the index is potentially setting up for a lower low, and if that happens, it will be in a long-term downtrend.

That's the pessimistic view, but there is another, more optimistic way to look at it:

When the S&P 500 rose in 2009, it failed to make a highest high, but the rise did come in a zig-zag -- high, higher low, higher high -- and that's the definition of an uptrend.

Following the higher high, the price has indeed dropped in 2011, but it recovered from the decline without breaking past the previous low, sealing the uptrend with a higher low.

Looked at that way, what's not to like?

Even optimists need to be cautious. Looking at the last three months, the chart shows a series of lower highs and higher lows. That by definition is a symmetrical triangle, a pause in the trend.

And symmetrical triangles are agnostic. They say nothing about the direction of the next trend once the pause is over.

The box score for the year:

-- Five rising months.
-- Seven falling months
-- Two of the falling months nearly closed where they began.
-- High 1370.58 in May
-- Low 1074.77 in October.

I never like to leave a chart without thinking about how I would trade it.

The base of the symmetrical triangle, set in October, is 217.89. The the sharp movement following the triangle ought to be that number of points from the apex.

This month the S&P 500 has moved 67 points, so the mid-point of the month is about 1236 (give or take).

That gives targets of 1453.89 if the price rises from the apex, or 1018.11 if the price falls. Either way, it is a trade with enough potential to be worth taking.

So if I were trading the monthly chart, I would open my position after the price had moved decisively off the apex, beyond the month's high or low, and then enter the trade.

As broad as that sort of movement would be, it is still insufficient to change the trend. The high target is below the pre-crash high of October 2007, and the low target is above the crash low of March 2009.

Of course, talk of such a trade is all very theoretical, since I don't trade the monthly chart. I lack the patience to wait for a two-year trend to complete before I collect my paycheck.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.