Tony Sun: Founder of KhronoStock.com
Just like Glenn Neely of NEoWave made his public service announcement regarding SP500 falling well below 500 in the next six months, I would like to make a similar announcement. However, I guess my announcement is more illustrative and colorful.
Once again, this is simply a public service announcement. Please do not take it as any investment advice and as always, nothing is 100% accurate. However, for subscribers of KhronoStock PRO, I am also justifying my position based my analysis of the current valuation disparity of the SP500 index.
What I am going to talk about is the obvious double top formation of the SP500. However, I have seen very few detailed analysis about this formation and almost no analysis that provides a concrete target assuming this formation completes itself.
All my comments are based on the graph that I constructed below for the general public.
The reversal pattern of SP500′s uptrend started since September 1st of 2000, where the index formed its first top at 1530.09. After the first top, the index found a medium term bottom on October 10th of 2002 at 768.63. This low is the confirmation point of the entire double top formation. The index in turn made a run from October 11th of 2002 all the way to October 11th of 2007 with its 2nd top formed at 1576.09. Since October 11th of 2007, the index has been on the path of a huge decline that finally stopped at 666 on March 9th of 2009.
The key here is that the decline of the second top decisively pierced through the 768 confirmation point back in 2002. Because of this, the probability that the current huge double top formation won’t complete itself is only about 17% making the probability that the formation completes 83%.
So why should we be so sure that this is indeed a double top formation that is in the final stage of completion? There are several important factors that confirm this for us.
1. Two distinct tops that appear at approximately the same price level (<= 3%).
- This is exactly the case. The first top at 1530.09 and the second top at 1576.09 is exactly 3% from each other. The two tops are highly distinct.
2. Tops should have significant time between them (more than 1 year).
- This is exactly the case. The time between the two tops is over 7 years.
3. Price closes below the confirmation point during the reversal
- This is exactly the case as the index pierced well below the confirmation point reached during October of 2002.
4. Volume made during the second top should not be significantly higher that of the first one.
- This is not the case but this point is not that relevant to an index in my opinion but rather it’s more relevant for a stock. Of course the volume on the index is going higher as time goes especially markets became so interconnected globally and the United States was flooded with liquidity for the past 20 years with the buildup of the financial bubble.
5. Pullback after the breakout of the confirmation point
- It is more common for the price to pull back to the confirmation level and then continues drift lower. The current situation is that the pull back well surpassed the confirmation point at 768. However, I argue that pull back to the 950 does not violate any rules and in fact it is reasonable. 954.28 is the initial top of the down trend reversal back in 2002 before the index came close to retest the 2002 low and started its climb to the second top. 1000 is also roughly the 38.2% retracement from the peak of 2007. Thus, a pull back towards either of these two levels was definitely a possibility and that is exactly what happened.
How is the target of 365 arrived?
The calculation is pretty straightforward. The height of the double top formation from the confirmation point of 769 to the higher of the two tops of 1576.09 is 807.45 points.
Normally, this would mean that Sp500 can decline another 807.45 points below the confirmation point. As funny as that sounds, I don’t think SP500 would go to zero.
Instead, another more reasonable alternative is that we take half of the 807.45 height and subtract that from the confirmation point. Thus, 768.63 – 403.73 = 364.9
What are the catalysts for the next phase of the decline and what is the significance of 365?
While this is more of a subscriber question, the obvious fact is that perhaps the entire growth that United States experienced since the 1990s is probably fake (SP500 was in the 300s during the early 90s), fueled by borrowing and consumption rather than producing. US has been relying heavily on emerging markets such as China and India for produced goods. Thus, there was no organic growth.
This fact is further exacerbated today with the further spending and money pumping into the banks and the multi-billion dollar stimulus packages.
The simple truth is that no one can spend its way out of debt. What is happening in the United States today and actually around the globe is similar to a person who borrows one credit to pay another. In the process, nothing is actually paid but simply delayed with interest continues to accumulate. This tactic can only provide temporary mental relief but the person’s debt is actually getting worse not better.
I hope this public article is somewhat helpful and makes sense.
Tony of KhronoStock.com
[Disruptive comment removed by moderator]
Comments like this shows that perhaps StockTock.com needs to further improve its viewer filter and filter out the ignorant ones.
Hey tony
I find your article very interesting as I believe your point about borrowing our way out of financial problems is perfectly valid. I believe the sufficient way to play this downturn would be to go short when we break 880 support?
Loevquist
Hi Loevquist,
or do SP500 LEAPS or long term put options.
Also keep in mind, this is just a conjecture. The Fed and the US government can delay the ultimate target for years as long as they can continue to borrow sort of like credit card roll overs where one can roll from one credit card to another.
I think 36.5 for S&P is more likely lol…
true, true if it’s worse than the great depression,than over 90% loss can certainly take us to that level
Tony thanks for your perspective. Obviously the issue today is whether we move towards SPX 1000-1100 from here with or without a retrace of low 800s.
Hi Phoevos,
Thanks for the comment. I think this new low issue will become relevant soon.
Also, I think 950ish level is likely the top (reached on June 5th).
Stocks are very expensive right now overall. Stocks trading at this level under this environment is ridiculous in my opinion.
Thanks. If 950 is the top then it will be satisfactory to many. EWI calls for a higher high and then the precipitous drop you are referring to,
That doesn’t make much sense to me. If it goes well beyond 1000, that would possibly invalidate the double top formation.
There is a whole debate raging on…Kenny’s TA et al. Personally I think the market can move up until mid September, after that I am more inclined for a move down.
http://www.decisionpoint.com/ChartSpotliteFiles/090626_ss.html
Yes this is definitely a debatable issue and that is a good chart. My bias is that it will touch off that 940 EMA then continues to head lower but it won’t drop significantly. It will trade in narrow side in sideways fashion until September/October and then the whole tragedy of 2008 could repeat again.
It’s kind of obvious that the 40 some percent jump in the SP500 is fueled by the billions of dollars pumped into the system and massive short-covering. There is no sustainable recovery in place. China is facing the same situation. The Shanghai Index could definitely make a new low below 1000 by year end.
How can a largely developing country carry the world forward with 80% of its population still at the poverty line. It is ludicrous.
Oddly enough I’ve been telling friends and family to be OUT of the market by September/October, unless they have a “short” mentality
Thanks for your input Tony very interesting to say the least. Just ignore that first comment.
Thank you Jeff.
Tony,
don’t be concerned when someone makes a smart comment. I have heard them for years
from people who think they know it all. (and most don’t know much).
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the market is still in a downtrend in my opinion and what we have seen recently is just
an exciting Bear Rally that has most believing that the worst is behind us and the next great Bull Market has started. My “RSI Range Rules” still point to the trend as down and I still have my “Negative Reversal Targets” open at much lower levels for all the stock indicies.
I have always made more money when I have – “allowed the market to show me what it wants to do and not what I want it to do”. In this case the trend is still down and I see it that way until the market shows me otherwise.
andrew cardwell
cardwellrsi@hotmail.com
Hey Andrew,
That email you provided me didn’t go through but I replied to your gmail. Thank you for the comment. Very insightful.
Tony,
The problem with your ‘prediction’ is that it is in a vacuum human instinct. Otherwise, we would not have stopped at 666.
While I am very bearish and have plenty of cash in small bills and a few guns and a solar powered home, – you make the grim reeper look like a Casper the Freindly Ghost. You are taking Mean Regression to the extreme and not accounting for standard deviation of ecomonic acceleration. Ecomonies do not grow in a straight x/y = constant.
Greed alone, as unpretty as it is, will stop us short of your target.
However, if we go nuke with North Korea (which I think might be about 20%), then your target might be high.
Thanks 3min,
Stopping at 666 was expected in many ways. Nothing goes down in a straight line. The scenario I mapped out could take years due to continued government intervention.
I would argue exactly the opposite that this prediction is in a vacuum human instinct. Human instinct right now is that things have bottomed and the economy is going to recover starting 2nd half of this year.
In many ways I am not making any prediction really. I simply used mathematical probability and indicated there is a 83% chance that this double top formation will complete itself and if it does, we are going to have the greatest vertical drop in the history of the stock market.
Mathematical probabilty….seriously.
The first thing you need to do when you find yourself in a pit…stop digging.
Double tops are one of the least reliable and least profitable patterns. The pattern’s performance is consistently below averange and its failure rate is high. Even Charles Dow believed it was a useless pattern. Where did you derive that their is a 83% chance that double tops complete themselves? In the case of Double Tops., Bulkowski (2000) studies showed that the failure rate in all varieties is larger than 33% breakeven threshold. However, I assume that this study was done on daily/weekly charts and not *yearly*. There is not enough statistical data, nor do I know any studies that looks at Double Tops over a 5-10 year timespan.
There is a triple top from 1962-1974 (however, this is not a large enough sample for making significant findings).
Zee,
Good technical comments without the doom or boom. Thanks for the clarity.
Separately, I just got back from a biz trip to China and it seems that most are freaking out about North Korea. They think the USA will go to war and that is why they are scared of the dollar. Personally, I think it will all end in talks but I hear Jack Bower is on his way.
3Min,
Where is the doom and gloom? We are objective traders and investors. So what if the SP500 drops to 365. That would mean if it is going that way, short positions are going to make a killing and we would still profit greatly from our trades.
Why is SP500 365 doom and gloom? To me, it is simply a justified correction due to the greatest financial bubble created.
Zee,
83% chance if the breakout is confirmed, that is we indeed have a break through well below the neckline (confirmation point).
Yes double tops do have a low probability of success. Once a true double top pattern is confirmed, the chance that it completes is fairly high.
Right now, the double top pattern on the SP500 is well confirmed.
Tony,
you post is a cut-and-paste from the same script that you have been pushing for a year now.
Back then you based in on financials using analysis from some man behind the curtain. You goal is to get paid subscribers – call it what it is.
Sorry, but I find you dangerous to those with ears to hear and greed to control them.
PS: still think FXP can’t go under 59?
Tony – Interesting post. I agree with you we are set up for a big fall. What do you make of today’s and yesterday’s action? It appears that we were ready for a move down to 880, and GS saved the rally again by propping us back up pass the biggest downward trend line. We were flat today and I almost feel like it’s a set up for another ram job to shoot us to possibly 930 to manipulate quarter end results. Like yourself, I believe 950ish was the top and am not sure if it can go any higher than 930. I guess the question is, what are you thoughts of what has happened past two days and what you think is most likely the action going to look like on Monday and Tuesday of next week? Thanks.
Hi Jim,
First, I appreciate your comment even after seeing the hateful comment from 3min. I don’t know why people would have such deep grudge against my comments or my service even though most of the things I predicted for 2008 were correct back then. Anyways, please ignore them if you can.
Yes Russell Reconstitution and end of quarter window dressing are definitely factors that caused to market to trade in such unpredictable manner last week.
Monday/Tuesday. If we continue to move higher, I would think it likely to be stopped at the 200 EMA of 940ish. This scenario is possible because Monday and Tuesday are the last two days of window dressing.
I would feel more comfortable shorting at 940.
Tony – Do you find this sustained rally odd? Everytime it seems like S&P ready to break, big buyer in the futures market saves the day. Since breaking the upward trend from March, the selling volume has not been as strong as I would have liked. I suspect a few things, 1) most hedge funds and banks are still net long, 2) shorts have gotten burned badly shorting this rally for past few months and 3) not enough conviction from the shorts. Like most traders, I believe GS and the gov’t behind the support underneath the futures market. If that is so, do you really think your theory can play out? It seems like this market is just one big ponzi scheme now. The gov’t either providing unlimited liquidity to GS or GS is just buying and slowly selling off the futures to recycle capital for further manipulation. In a normal free market, I think you’re theory is 99% certain, but today’s market has the PPT factor and no one to challenge GS, which MAY ultimately nullify your theory. Thoughts?
I don’t think they can go on forever like that, they’re already stuck for two months in a narrow range and evidently there are no buyers, just the PPT propping up the markets. One day it’s gonna blow and we may see S&P at 36.5 in years time as Keil mentioned above (if it’s worse than great depression,than over 90% loss from the top will take us below 100 !!!)
Sure Fafura. I would say 90% from the very top of the 1576, so that would be 157 although I doubt that. I think with SP500 at 365ish, we will likely see the stock market bottom of our lifetime.
Hi Jim,
1) most hedge funds and banks are still net long,
- Not sure abou this. At least we are not “net long”. In fact, insider selling far out weighs insider buying.
2) shorts have gotten burned badly shorting this rally for past few months
- Yes and they panicked. Rally from March to April is almost pure panic short covering.
and 3) not enough conviction from the shorts.
- Yes that is fair to say especially that this rally has gone for 3 straight months and now it’s consolidating trading sideways.
Yea GS and the government definitely manipulate the market but I don’t believe they can do that forever. Market got to do what it got to do.
It’s the channel. We will stay in it to the bottom. EWI is wrong, again. Neely is spot on, as usual. Tony’s work reinforces my work.
http://social.stocktock.com/photo/channels-rule-the-game
http://social.stocktock.com/photo/20002003-bear-channel
http://social.stocktock.com/profiles/blogs/time-is-running-out
http://social.stocktock.com/photo/20072010-bear-channel
The weekly technicals are toppy, so the next drop could start at any time.
I think there are some issues with your analysis (although the work is appreciated). You lay out five criteria that need to be met in order for there to be confirmation of the double-top formation. When discussing the criteria, you acknowledge that while the first three have been met, the last two have been violated in some form or fashion and you then try to explain away these issues with opinions (because you want the confirmation).
I will be impressed if you can explain how you came up with the 83% number. Are you saying that you have analyzed all of the available data and these patterns complete 83% of the time when the five criteria have been met? What is the percentage when only the first three have been met?
Also, why did you simply divide the 807.45 number by half to calculate what you define as a “concrete” target? You call the calculation “straightforward” but what it really should be called is completely arbitrary. Do you have any evidence to support the idea that cutting it by 1/2 (instead of 1/3 or 1/4 or 1/137) is the appropriate amount?
4. Volume made during the second top should not be significantly higher that of the first one.
“This is not the case but this point is not that relevant to an index in my opinion but rather it’s more relevant for a stock. Of course the volume on the index is going higher as time goes especially markets became so interconnected globally and the United States was flooded with liquidity for the past 20 years with the buildup of the financial bubble.”
OK, explain why this point is not relevant to an index? Why would this even be a criteria if it was a given that the volume was going to be higher over time? If the criteria offered are not really relevant to an index in your opinion, then why are you using an index for your example? Also, the flood of liquidity over the past 20 years does not explain away the volume difference over the 7 years between the tops.
Morris,
This volume criterium is not that relevant for an index because an index is a composite of stocks. In this case 500 of them. As liquidity increases from the 1990s till now, volume of trading with the index can only go up. The flood of liquidity can definitely explain this., I would say the invention of the “online” brokerage for example brought in unprecedented amount of liquidity from the retail side because trading costs were lowered significantly.
I am using the index because I am making a general statement about the market and SP500 represents the market.
This volume criterium is more relevant for a single stock because volume of trading for the particular stock does not always go up as time passes. The point here is that during the second run up, if the volume is not as strong or much stronger than that of the first run up, that shows that people have less conviction in the stock, which explains the final leg down.
But for an index, due to the flood of liquidity coming into the market over the years, volume simply doubled or tripled.
Morris,
You are asking for some very specific proprietary/trading information. It’s asking a trader how he calculates his personal indicators. This topic is not appropriate for discussion in a public area like this. I am sorry.
But one thing I can say is that it’s not arbitrary. But nothing is 100% concrete. The title of the article is called “estimated bottom” and also this is merely a public service annoucement.
I am not sure if I agree with the analysis. Many of the leading economists and traders whom I respect like Jim Rogers and Mark Faber are talking about hyperinflation down the road. The strategy of extremely large deficits and printng vast amounts of money is bound to cause jump in inflation at some point.
In an inflationary environment, all asset classes appreciate – some more than others. This will result in the market going up and not down.
Rocky,
In that case, you have to adjust the nominal stock prices for inflation. If you do that, then the real price will be shockingly low.
I do not totally understand inflation. But a lamen view is that inflation is a joke. We lost so much money on this drop (20 – 30 trillion of wealth) that the little bit we put in doesn’t dent it. For inflation to occur doesn’t there need to be more money in the system than before? So everyone has more money to buy so prices go up? I don’t see anyone having more money than before. De-leveraging is taking away electronic money.
I have been researching this since I posted, and I agree with my post lol. Who is chasing what right now? No one is chasing prices, any money saved went to pay down debts. No more money pumped into the economy besides goverment money which went to the banks and are they loaning it? No. I believe this although painful, is the way out. We need to get out of debt. The bailout will continue to sustain for a little while. It was needed to stop a massive heart attack, but did not solve anything. China has pulled commodity prices out of the dumps yes, but they cannot sustain a global economy by themselves yet. I want one inflationist (sounds like a bad word huh?) to counter this point so I can understand better.
There are some inflationary price increases I see, but where does the money come to follow that? It is just another bubble ready to collapse. Fed-Ex increases their prices 5%, inflationary in a way, only if it can be paid. The business I just left was promotional products, where we ship alot. Our sales went down 25% and we are expected to pay more in shipping. Sounds like a disaster waiting to happen to me. I honestly hope that this is stabilization right here. I can deal with a sideways market for the livelyhood of my kids. But where is the growth? We need to develop a new product or service and that is far off. Anyone who says tech will lead us out is ridiculous. Why can’t any other country capitilize on what we have already done, they will and cheaper. We have “cutting edge” things, why does a developing country want to pay more for what they won’t fully utilize for a long time. We cannot pull ourselves out of this at this rate. Protectionism seemed like a bad idea at first but not now to me. My kids will be working for 3.00 an hour and be happy making american goods for american people. Because India and China will buy their own without having to pay for shipping.
::he said to himself::
Greg,
Thanks for the comment.
The bailouts and stimulus effects are waning. I give it another 2-3 months. I am sure they will continue to find ways to stimulate the economy but the unfortunate thing is that they have targeted the wrong area.
The correct area is still the zombie banks and that 64 trillion dollar derivatives market. No one seems to be talking about that anymore these days assuming that the financial crisis is over. I don’t think so.
Interesting point about labor. Yes labor will get cheaper. But the only way to do that is further devastation so more people will be willing to work for less. We are not at that point yet, which means that things will get a lot worse in the near future.
If you randomly go ask people on the street, “are you willing to work for $3 per hour”, I would assume that over 50% of them would say “no”. This is when unemployment is at 9.4%.
In the next 6 to 12 months, when unemployment jumps to 20 to 25%, I would say labor cost will come down dramatically.
The most influential people that I follow like Talib(black span) and Nenner are predicting inflation cycle that could last for many years after the deflation is over this year. I Think S&P 500 could be 300 as inflation adjusted, also I do not see your calculations adjusted for inflation. For example in 80′s S&P value was 300s but what is value in terms of today’s adjusted for inflation.
Hi Kamal,
I don’t think it’s necessary to adjust a equity index for inflation. Stocks are actually pretty good inflation absorbers, so in a way, the nominal value in some way already adjusted for inflation. It’s more useful to look at average real earnings of the 500 stocks instead.