Introduction
The S&P 500 index (SPX) has been consolidating since March, 2015, hemmed in by weak GDP data, head-line grabbing crises in Europe and the looming lift-off in interest rates from the US Federal Reserve. The most recent analog model for a prolonged consolidation in the SPX is 2011 and upon further review, 2015 is looking more and more like 2011. For a detailed analysis, please see the reference below.
An External Event (the Debt-limit Crisis) Triggered the S&P 500 Mudslide in 2011
The SPX traced a broad head-and-shoulders pattern into the summer of 2011. It was forming the right shoulder in July, 2011 when the reluctance of the Republican-led congress to raise the US debt-limit provided the external trigger for a rapid price collapse that ended the consolidation. The SPX found support approximately at the same distance below the break-down point as the prior high was above it. The consolidation range had been approximately 120 points above 1250, and the market forged a bottom at approximately 1130 (=1250-120) after forming a spike low down to about 1100 (see Figure 1). So the approximate height of the rectangular consolidation in 2011 provided the rough price projection down to the eventual support.
Figure 1: The market was just forming the right shoulder when the debt-limit debacle tripped the market lower. It found support near the technically predictable level of 1130.
The 2015 charts using 2011 as a model
We can use the 2011 analog to make a price projection for any eventual breakdown out of the recent consolidation, if it were to occur (see Figure 2). As in 2011, we would need some external trigger.
Figure 2: Using the height of the consolidation as guide, via the 2011 charts, we can project down to the 1950 area, which is not far from the 61.8% retracement of the move since the October, 2014 low. However, we need an external event to trigger a mudslide down to 1950.
Summary
The 2011 consolidation in the S&P 500 index is a good analog model for what could occur in 2015. An external event would be necessary to trigger declines out of the current consolidation range, and the one prominent event visible on the horizon is the Federal Reserve (FOMC) meeting on September 16-18. However, Congress is coming back with a full agenda, and they could also inadvertently provide a push since the debt limit must be raised again. We will just have to wait and see.
Reference
For a more complete discussion, please see http://www.etfmeter.com/blog.aspx?id=4408
Tushar Chande
