S&P 500 Chart Analysis and Comparisons

There is absolutely zero confirmation of today’s breakout in the S&P 500. Looking at charts of other stock markets and metals, this is almost assuredly a fake out but it could last another 40-50 points.

After trading between 1100 and 1225 since mid-August we broke out to the downside and then snapped back higher. Oftentimes when you get a false breakout in a range trade, it will breakout on the other side. A widening wedge, like the one illustrated by the orange lines is extraordinarily rare. I believe there is further room to run on the upside, but not much.

The number one reason it will ultimately fail: no other stock markets are confirming the US move.

First, we have the Shanghai composite. Not only has it declined, despite investments from China’s sovereign wealth fund and its pension in the past few weeks, the SSE touched the lowest April 2009 just yesterday. At the moment, the 2330 is extremely important. If it breaks (definitively) it’s a long way down before more support. To me, this probably the most important chart in the world in the week ahead.

Second, we have the French CAC. Similar to the S&P 500 chart but we are now 7-8% below the August highs.

Third is Canada, which has made some recent gains but is clearly trending lower.

Fourth is copper, which is nowhere near the August highs, or even October highs. Industrial metals like copper are the preeminent indicator of global growth. There has been talk of inventory manipulation in copper but it’s non-sense. LME aluminum hit a 13-month low yesterday. Lead and zinc are at the lowest since mid-2010.

So what’s happening?  Let’s take a look at the S&P 500 over the past four years.

I was unable to get a daily chart for this time scale so this is a three-day chart but notice the similarities in the two areas in orange that I have circled. Let’s take a closer look at the similarities to the all-time S&P500 peak and the current chart.

 

Notice the false breakout to the downside followed by a rebound to a fresh high, above the recent range. It’s the same rare pattern that we’re seeing now, and it also follows a breakdown from the peak.

 

I believe the S&P 500 will follow a similar pattern to the fall from the 2007 peak. How deep we fall will depend on the response from policymakers.

In the short-term, this is a negative for my EUR/USD trade. I’m tempted to raise my stop above 1.3936. Obviously the trade has gone against me despite the difficulties at the EU summit and I’m holding a 68 pip loss currently at 1.3843 but I’m more confident than ever about the overall direction of the risk trade. I may open a long USD/CAD trade to further reflect this.

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