After looking at economic data and industry indexes, I now want to show you how geometric shapes and trend lines over the long term can help time cyclical market turns and, in a bizarre way, sometimes predict price targets (the linear equation conspiracy). This post will include charts of the Dow Jones Industrial Average, S&P 500, Russell 2000, Dow Jones Transportation Average, and the NYSE Composite Index (or NYSE Primary Exchange Index), as well as charts that are adjusted for inflation (CPI). My next post will provide an update on the market with trend lines and breadth, momentum and volatility indicators.
On the charts below, it looks to me like the current bull market is just about overstretched at the moment and due for a major correction or bear market. But, more importantly, how low will we go during the next down cycle? The next cyclical bear market could generate a reverse head and shoulders bottom for the current secular bear market (retest the 2002-2003 lows). Or, the market could make new secular low based on the long-term trend lines. Basically the gloom and doom, Dow 5,000, or no return on stocks for 10 years scenarios. So which will it be?
Either way, if you're still long this market and betting on the stock buyback/QE short squeeze-a-thon to continue, volatility is still cheap to hedge against (or profit from) the next 10-20% correction, which will result from a technical breakdown in the intermediate term (let's say the next 3 to 12 months). I also think equity indexes are still exhausted and in the process of forming a cycle top, which sometimes takes 6 to 12 months to officially form. That time period also lines up well with the the resistance levels on the charts. All daily charts go back to 1995 courtesy of stockcharts.com (click the images for a larger view).
Dow Jones Industrial Average ($INDU) and Dow Jones Industrial Average in real terms with relative strength index (RSI) ($INDU:$$CPI)
S&P 500 Large Cap Index ($SPX) and S&P 500 Large Cap Index in real terms with relative strength index (RSI) ($SPX:$$CPI)
Russell 2000 Small Cap Index ($RUT) and Russell 2000 Small Cap Index in real terms with relative strength index (RSI) ($RUT:$$CPI)
Dow Jones Transportation Average ($TRAN) and Dow Jones Transportation Average in real terms with relative strength index (RSI) ($TRAN:$$CPI)