For several months we’ve been saying we think the 1900 – 1920 area is the likely top for this move in the S&P 500 index. (SPX). This could be the week it gets there.
The 1920 target is our initial calculation based on the first bullish breakout from 1575-85 (the break above the double top formed in 2007).
In the year from that initial breakout the market has moved about 500 points; in the 30 months from the most recent significant retracement (October 2011) the market is up about 900 points. So a top is near. Is this it?
HERE IS OUR THINKING
First, the daily chart for the SPX is forming a pattern that almost screams choppy top: a combined head-and-shoulders and inverted-head-and-shoulders with multiple shoulders in each.
SPX Daily chart, May 9, 2014
That kind of battle often it ends with a spike top followed by a significant retracement.
In this case, the bulls may push the market above the psychologically important 1900 level, and the ensuing short squeeze runs the stops all the way up to around 1920 and perhaps higher. Then it runs out of gas, and starts the pull-back we’ve all been expecting for weeks.
WHY NOW?
Three things: this week is the monthly options expiration on the SPX. There will be some wide swings as a result. It is also our change-in-trend day (May 14, +/- a day) a proprietary indicator we use to tip us off about market reversals. And it is the end of the favorable seasonal bias for equities, when investors are well-advised to “sell in May and go away.”
That predisposes to think this could be the time. But it’s not cast in stone. In particular, the increasingly bloody civil war in the Ukraine could quickly knock the market down.
UNLESS WAR INTERVENES
German media are reporting U.S. private mercenaries are operating in strength in the Ukraine, and there have been new reports of neo-Nazi atrocities, including an incident where the recently-recruited Ukrainian National Guard closed a polling place in Sunday’s secession referendum and shot and killed people who protested.
The voting in Sunday’s poll was very heavy, and reportedly heavily in favor of seceding from Kiev. If Russia wants an excuse to move the army into Ukraine, there are lots of them.
The strategy of the Kiev government has been to attempt to provoke retaliation from Russia, in hopes the U.S. or NATO or both will intervene.
If they succeed and Russian tanks roll across the border, all of our careful calculations go out the window. War trumps technical analysis every time.
