In the last post, someone commented on the apparent huge double top in the S$P 500, affectionately known as "Spoos" for the September futures symbol SPU. I will resist digressing into some of the other tradable names I have used over my career.
Anyway, the jumbo pattern on monthly charts is clear.
First, this is not a double top pattern until it breaks the support level at 768. But let's say it does. Where would we measure the target? After all, targets are supposed to be the height of the pattern projected down from the break.
Do that here and get a negative 37. Someone in another blog commented that a negative price might actually be real given the mess our mortgage friends got us into but that is another topic.
Show of hands - can spoos go negative? Of course not. Absolute support is at zero and if we get there who will care about the financial system? I'll want my guns and bottled water and a fortified, self contained mountain top cabin.
When measuring downside targets, especially for large patterns, I switch to log scaled charts and project physical distance, not price, down from the break point.
This is still apocalyptic but at least it has a chance to be valid. A drop like this one would erase 21 years of gains and bring spoos to their August 1987 peak.
Show of hands - who believes that a breakdown below October lows would kick off such a plunge?
For those of you who raised your hands, go change your underwear, have a beer and think about limitations on how "macro" technical patterns can get. I am a hardcore technical analyst but even I would not think that we can actually measure a decade long pattern of that magnitude and get any sort of reliable pattern projection out of it. Short-term, this stuff works like a charm. Long, long-term? No way.
But for those who want some real refuting evidence, how about this - the S&P 500 is the only major index to sport a possible double top. So would it be possible for this index to plummet while the other have no standalone reason to do the same?
In the stock market, we are blessed with enough ways to slice and dice things to make our own infomercial. Buy it now! Only three easy payments of $19.99! But because we have so many indices we must - repeat must - look at more than one of them to make macro-sized forecasts. The Nasdaq has not even come close to its 2002 low. Neither has the Russell 2000 and for the latter there is huge support awaiting.
No, I am not saying anything about where the bottom may or may not be. I am just saying that measuring a possible double top pattern in the S&P 500 is the wrong move. Even if we see a new low, it will not be the end of world as we know it.
