3 Must-See Market Charts - Buy or Sell?

The Dow Jones Industrial Average closed Tuesday at the best level ever after breaking through the 14,200 area. The S&P 500 remains below its all-time high of 1576; it is currently trading at 1540 and therefore would need to rally another 1.7% to join the Dow at the best level ever.

Below is a one-year chart of the S&P 500. It shows the new yearly highs on the right hand side of the chart. What I find interesting about the last year is that every pullback (February, December 2012, November 2012, May 2012, etc.) were all met with the same response by the media and most investors, “the bubble is bursting”. But in reality, each pullback was a new buying opportunity to get in at discounted prices. The new high keeps intact the current uptrend of higher highs and higher lows.

The next chart is of the S&P 500 over the last 20 years. Each candlestick represents one month of trading action. There is a very distinct pattern forming – a Bearish Triple Top. In 2000 the index topped out at 1552, in 2007 the index hit a high of 1576, and as I mentioned above the S&P 500 is now at 1540. This is about as easy of a triple top there is to identify.

There are two ways this can go. One would be if the index continues its patterns of the past and fails to break above the horizontal red line at the top of the chart. This would lead to a sizable sell-off based on the past performance of the chart.

The second option for the index is to break above the resistance line and confirm the breakout by trading above 1576 for a few weeks. If this is the case it would mark a significant move and the start of a very strong next leg of the current bull market.

We will be watching the 1480 as initial support for the index and the 1576 as resistance. If the index consolidates between these two levels it could be seen as consolidation before a breakout. But, if the 1480 level is breached we need to focus on lightening up our exposure to equities.

The last chart is of the Dow Jones Industrial Average dating back to the 1920’s; each candlestick on the chart represents one year. The S&P 500 does not have data going back to the early 20^th century and this is why I turned to the Dow to illustrate my view.

It may be a little difficult to decipher, but you should be able to pick out cycles that take place on a regular basis for the Dow since the 1920’s. Here is a breakdown of the cycles:

·      1930-1948 – The early part of the cycle was selling from the Great Depression and the second half was a rebound to get the index unchanged for the 18-year period.

·      1948-1966 – Post-WW2 rally that lasted 18 years.

·      1966-1982 - the Dow again experienced a series of ups and down, however during that 16 year span the index was unchanged.

·      1982-2000 - The great technology rally began in 1982 and it lasted until the tech bubble burst in 2000, a total of 18 years.

·      2000-Present: Two major rallies were joined by two devastating sell-offs (tech bubble and financial crisis) and the current cycle is now at 13 years.

So? Are we in the midst of another sideways cycle that has a few years left in it? We very well could be if the major stock indices are unable to continue the current breakouts and rally at least another 10%. In that case we would be back into the grinding sideways cycle.