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A Death Candle for the S&P 500

 -- Published: Tuesday, 1 September 2015 | Print  | Disqus 

By Craig Hemke

Past performance is not always a reliable indicator of future results. In this case, however, it very well may be. Therefore if you have stock market exposure, either through mutual funds or your 401(k), you definitely want to make note of this long-term chart.

Click to enlarge to chart below and take a good look. When you're finished, keep reading and we'll explain what you see:

Above is a 25-year, monthly chart of the S&P 500. Note that the general trend is positive but it is marked by two, significant bear market corrections.

First, note the rally that began in 1995 near the 450 level on the S&P and extended all the way to a rounded top near 1,500 over an eight-month period in 2000 when the buying momentum was finally exhausted and the market began to roll over. Often, market tops are noted with clear 20/20 hindsight and this was soon to be the case here. Note the big, nasty "Death Candle" on the chart for December of 2000. To make it easier to find, we've marked the chart with a blue arrow.

In December of 2000, the S&P saw a high of 1,389, a low of 1,254 and a final close of 1,320. This meant that, for the month, the range was 9.72% and the final loss was 4.97%. This painted a nasty, red candle on the chart that again, with the benefit of hindsight, clearly marked the trend change and the end of the bull market. By the time the S&P bottomed in October of 2002, the index had fallen to a low of 769. The total drop from the peak of 1,553 in March of 2000 to the low of just 769 in October 2002 was just over 50%.

From those 2002 lows, however, a new bull market rally began. It lasted just over five years and it peaked in November of 2007 at S&P 1,546. Once again, the stock market was forming a 6-8 month rounded top and it began to roll over in early 2008. Now please locate the middle blue arrow on the chart above. Note that it is pointing at the month of January 2008 and the big, nasty "Death Candle" found there.

In January of 2008, the S&P saw a high of 1,472, a low of 1,270 and a final close of 1,378. This meant that, for the month, the range was 13.72% and the final loss was 6.38%. Just as in December of 2000, this "Death Candle" marked the end of the bull market and beginning of a steep, painful correction. From a high of 1,546 in November of 2007, the S&P fell to a low of 667 in March of 2009. That's a total drop of 56.86%. Yikes!

Which brings us to present day and the third blue arrow on the chart that is pointing to the just-completed month of August 2015. Once again, the S&P appears to have completed a 6-8 month rounded top, failing on multiple occasions to breach stout resistance near 2100. And now look at what has been painted onto the chart...another Death Candle.

For the month of August 2015, the S&P saw a high of 2,113, a low of 1,867 and a close of 1,972. This meant that, for the month, the range was 11.64% and the final loss was 6.67%. Just as in December of 2000 and January of 2008, we will almost certainly be able to look back in hindsight and see that August of 2015 marked the end of the most recent bull market. Should history repeat...and we see no reason why it shouldn't...over the next 12-18 months, the S&P will now fall about 50% from it's most recent peak of 2,135 in May of this year. This would bring the index back down to 1,000-1,100 range by sometime in late 2016.

Therefore, the time to act is now. You can either continue to drink the hopium of Bloomberg and CNBC or you can respect "The Death Candle" and take action to avoid losses similar to 2000 and 2008.


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 -- Published: Tuesday, 1 September 2015 | E-Mail  | Print  | Source:

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