S&P500: 3 bubbles - where is the bottom?

Dotcom bubble (2000), housing bubble (2008) and the current market situation – what do they all have in common? From a technical perspective, they all started the same way. While history never exactly repeats, it often rhymes. So let’s look back and see what we can learn and derive from it.

For a better comparison, the following charts are plotted on a monthly basis (1 bar = 1 month)

All bubbles were built up in the following structure:

• A long extended uptrend leading to very high MACD readings
• A MACD / MACD signal line cross-over signaled the end of the uptrend and the start of the correction
• A short-term recovery was typically a bear trap followed by even lower market prices
• A MACD cross down the zero line signaled a continuation of the bear trend.

Current situation

The SPX has been in an incredible uptrend of 13 years and until summer 2021, the sky seemed to be the limit with unrealistic high P/E (and other) readings. The market always correct anomalies, sometimes (driven by algos), it takes longer. But once the algos decide to “sell” the driving force is way to stop quickly.

The SPX had its cross-over in March 2022 and with no surprise the markets have edged significantly lower since.

Looking at the daily time frame, the chartist can spot a bullish short-term tendency, which can lead to slightly higher prices – the overall situation remains bad (Ukraine, inflation, staggering debt… ) however.

A MACD cross down the zero line has not happened yet. But this gives you an idea how much further the market can go lower!

I would not call the current market movement a crash in installments, but rather a correction from the unrealistic highs.

There are several methods to see where the market can find support:

• Long term trend lines (“the longer, the stronger”)
• Fibonacci Retracements
• Moving Averages (200 periods)

For better reference, the “short term” trend lines are plotted bold in blue colors (dotted for parallel ones) and reaches back 13 years, while the “long term” trend line is plotted in bold green color and reaches back nearly 50 years!

The next short term trend line at 3505 points is “only” approx. 10% away. If you feel like that is a lot, then you will get an idea how extended the market has moved.

The second next trend line sits at 3195 points (-18.13%) and is an area of confluence of the following indicators:

• close to a parallel short term trend line
• near the short term trend line
• the short term Fibonacci retracement (61.8%) converges with a long term Fibonacci retracement (0.382%)

Depending how the overall economic situation will develop (inflation, Ukraine, gas&oil prices,…), the situation will have to be re-evaluated. As this chart is plotted on a monthly basis, we will have plenty of time to do so.

If you look at this very long-term chart reaching all the way back into the 70ies, you will see the significant trend lines and Fibonacci retracement levels.

Conclusion

The MACD-indicator is far from reaching the zero line and the market is far from reaching retracement levels, so there is still plenty of downside potential. When and if it crosses the zero line, even further downside moves seem possible. Keep your stops tight and time your entries wisely, as this is no longer a buy-and-hold environment!

About the author

Patrick Pfister is the President of the Swiss Association of Market Technicians (SAMT) and a seasoned technical analyst based in Zurich, Switzerland with a passion for unraveling the complexities of financial markets through data-driven insights and analytical expertise. With a solid academic background in mathematics and computer science, combined with more than 20 years of hands-on experience in the financial industry, Patrick has established himself as a trusted authority in the field of technical analysis.

Patrick embarked on a career that has seen his work with top financial institutions, where he has honed his skills in interpreting market trends, identifying patterns, and developing innovative trading strategies. His deep understanding of statistical models, quantitative analysis, and risk management has enabled him to make sound investment decisions in dynamic market environments.

Patrick is known for his meticulous attention to detail, his ability to communicate complex concepts in a clear and concise manner, and his commitment to staying at the forefront of technological advancements in the financial industry. He is a sought-after speaker at industry conferences and seminars, where he shares his knowledge and expertise with fellow professionals and aspiring analysts.

In addition to his work as a technical analyst, Patrick is also a mentor and educator, guiding the next generation of analysts and researchers in the field of financial analysis. His dedication to fostering talent and promoting excellence in the industry is a testament to his commitment to advancing the field of technical analysis.

Outside of his professional endeavors, Patrick is an avid traveler, an aviation enthusiast, and a lifelong learner who is always seeking new challenges and opportunities for personal growth. He believes in the power of continuous learning, adaptability, and perseverance as the keys to success in both the financial markets and in life.

Patrick's unwavering dedication to excellence, his innovative approach to technical analysis, predicated on multiple-timeframe turnaround patterns, and his passion for empowering others makes him a true asset to the financial industry and a respected figure in the world of technical analysis. .

Having published his research through a Wallstreet research company, you will find his posts now regularly on LinkedIn as well as on the BLOG of SAMT-org.ch.