BarroMetrics Views: The S&P and the Middle East

The decline in the S&P that was preceded by the weak structure - low volume and range in an uptrend - has brought hope to the bears. I have heard speculations for declines from 12% to 20%.  Of course anything is possible, but I doubt if a dramatic decline is underway.

Figure 1 shows there is no change in trend in sight - not even in the weekly trend (blue line, 5-day swing). Pete Steidlmayer taught that markets go from  up to sideways to down, down to sideways to up. They seldom go from up to down. We have yet to see any sideways structure on the S&P.  Indeed, the 18-day trend (monthly) could retrace to 1233 without throwing the uptrend into doubt.

What about the Middle East?  I see that as ’surprise event’ - an event that does not change the underlying structure of the market - e.g. Katrina. That being the case, once  the Middle East resolves itself or becomes ‘old news’, we’ll see the underlying trends re-assert themselves.

So what now for the S&P? Figure  2 shows that after the April 1971 to Nov 1971 correction (in the current S&P, April to July 2010), we saw a 5-month sideways move. In today’s picture this would mean a sideways move till June 2011 (assuming I am right the ultimate high of this move will occur Sept 2011). In 1971, the sideways range was 9.33%.  If we assume that high for the sideways move will prove to be 1346, a 10% decline will project a target to 1211.

Figure 3 shows support 1220 to 1174, so 1211 for the low of the range seem reasonable.

FIGURE 1  18-d and 5-d Trend

FIGURE 2 S&P 12-M 1966 to 1982

FIGURE  3 S&P 12-M 2011

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