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Right now the monthly chart of the S&P 500 Index (SPX) is crying out — screaming,
even — for a 38.2% retracement to 1740. Here’s why.
The above introductory comments are edited excerpts from an article* by David Nichols (fractalgoldreport.com) as posted on Safehaven.com under the title Special Report: The 64-Month Pattern in Stocks and Gold.
Nichols goes on to say in further edited excerpts:
One of the foundations of market movement is the golden spiral, built on the familiar fibonacci relationships of 61.8% and 38.2%. Natural systems develop along these fibonacci ratios for the simple reason that they are infinitely scalable in both directions — they can get smaller and larger in identical ratios, which is a defining characteristic of fractal systems like markets. They have to have these scaling factors built in.
The figure above shows a golden spiral, which is a special version of a logarithmic spiral. The key thing to notice on this golden spiral is that the curving spiral line reaches the end of its rectangular segment and then curves back precisely 38.2%. It then does this again on a smaller scale — or on a larger scale — depending on which direction it is going.
After a trend that has reached its conclusion, as a market shifts to seek equilibrium, it moves inward along this same golden spiral path, which invariably leads to a 38.2% retracement of the preceding trend.
The energy for this 38.2% retracement is built-in to every market trend. It is not something separate that exists on its own — instead it is part of normal market movement, as it is the counter-energy that releases after the primary trending energy has reached its maximum point.
Right now the monthly chart of the S&P 500 Index (SPX) is crying out — screaming, even — for a 38.2% retracement.
Never in modern market history has a pattern extended like this. There have been plenty of extensive, multi-year rallies, but they have all ended with a hard retracement, or an outright bear market. This pattern will finish with a 38.2% retracement as well, as the counter-energy for this move down is already embedded within the pattern.
The most pertinent historical example is 1987.
Right now SPX 1740 is the likely target for a hard retracement. This 1740 area seems like a long way down now that the SPX is creeping around the 2000 level. It also seems inconceivable that a market pattern showing such consistent, grinding gains — with such low volatility — could drop 250 points or more in such a short time but it’s easy to forget that SPX 1740 was the low only 7 months ago.
There is major precedent for a market pattern to “up-chuck” the last 8 months of gains during a hard retracement. In fact, we saw just this phenomenon at the Aug 2011 top.
This was also the case during the 1987 crash. It seemed like a huge move — it was a huge move — but it was mainly just a reaction to the outsized and unstable uptrend that directly preceded it.
I bring this up because a window is blowing wide open for this same thing to happen from late September to early November 2014. There has even been a similar run-up right now to the pre-crash period in August 2011, with a 119 trading day rally setting the stage for the instability to follow.
There are a couple of things to notice about the pattern from 2011. The unstable period that followed this 119 day rally included some fierce upside blow-off moves, very similar to what we’re seeing now. This is the “clear-the-decks” phenomenon where both sides of the market’s order book get blown out.
So even though 1740 is directly in the picture over the next few months, it doesn’t preclude the market from going higher during one last paroxysm of buying. This would be every last short getting taken out before the drop.
The bottom line is it looks extremely likely the SPX will be dropping to 1740 at some point in the near future, but there is still an unanswered question about how high the shorts will get squeezed prior to that drop.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.safehaven.com/print/35456/special-report-the-64-month-pattern-in-stocks-and-gold (Copyright © 2008-2014 Fractal Gold Report. All Rights Reserved.)
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