My target for the current S&P 500 long-term advance has been 3000 for a number of years. The chart below explains the target calculation.
Click here to view a full screen image.
The Dotcom bubble retraced from a peak of 1500 to a low of 800. Readers who are familiar with my method will know that on a short- or medium-term chart I would simply extend the retracement above the previous peak of 1500 (giving a target of 2300) but long-term charts work better on a log scale.
If we extend the distance between peak and trough above the peak on a log scale chart, we get a target of 2800.
If we do the same for the global financial crisis (GFC), we get a target of 3200.
Mid-way between the two is another important target, of 3000, which is double the previous two peaks at 1500.
Of the three targets, I feel that 3000 is the strongest. Not only because it is the middle target and double the previous peaks, but round numbers are important psychological barriers. The Dow, for example, took more than 10 years to break resistance at 1000.
Now some may feel that technical analysis like this has as much significance as reading tea leaves or consulting your astrological charts. But observation shows that market activity tends to cluster around significant levels (e.g. 1500) or numbers and can present formidable barriers to trend progress.
Primary Support
The next question is: if the market reverses at 3000, how far is it likely to retrace? There is no straight answer, but primary reversals normally retrace between 50% and 100% of the previous gain, or between 25% and 50% of the current level.
There are two major support levels evident on the chart:
- The 2100 peak from 2015, a 50% retracement (on a log scale) of the preceding advance; and
- The 1500 peak from 2000 and from 2007, marking 100% retracement of the previous advance and also a 50% retracement from the current level.
A lot would depend on the severity of the reaction.
“You watch the market — that is, the course of prices as recorded by the tape with one object: to determine the direction. Prices, we know, will move either up or down according to the resistance they encounter. For purposes of easy explanation we will say that prices, like everything else, move along the line of least resistance. They will do whatever comes easiest, therefore they will go up if there is less resistance to an advance than to a decline; and vice versa.”
~ Jesse Livermore