Bullish Longer-term Price Patterns

In Friday’s chat I reviewed some of my favorite ‘big picture’ indicators, most of which are bullish on the market. One point I didn’t get to is that price action reinforces what the indicators suggest. For instance, note from this chart that the S&P500 is going for a third consecutive up quarter. Since 1950, we’ve seen 23 separate instances of three consecutive up quarters. In all but one case, the S&P posted a subsequently higher quarterly close within the next nine months. The third up quarter will be confirmed on a year-end close above SPX 1057…

S&P500 Rallies Three Consecutive Quarters
03/30/07… Higher Quarterly Close in Three Months
12/30/05… Higher Quarterly Close in Three Months
12/31/03… Higher Quarterly Close in Three Months
06/30/99… Higher Quarterly Close in Six Months
09/29/95… Higher Quarterly Close in Three Months
12/31/92… Higher Quarterly Close in Three Months
06/30/89… Higher Quarterly Close in Three Months
06/30/87… Higher Quarterly Close in Three Months
06/30/86… Higher Quarterly Close in Nine Months
03/29/85… Higher Quarterly Close in Three Months
03/31/83… Higher Quarterly Close in Three Months
12/31/80… Higher Quarterly Close in Three Months
09/28/79… Higher Quarterly Close in Nine Months
06/30/76… Higher Quarterly Close in Three Months
06/30/75… Higher Quarterly Close in Nine Months
03/31/71… Higher Quarterly Close in Nine Months
12/31/68… No Higher Quarterly Close In Nine Months
06/30/67… Higher Quarterly Close in Three Months
03/29/63… Higher Quarterly Close in Three Months
09/30/58… Higher Quarterly Close in Three Months
06/30/54… Higher Quarterly Close in Three Months
03/31/52… Higher Quarterly Close in Three Months
03/31/50… Higher Quarterly Close in Three Months

In addition, the S&P has already triggered another rare price pattern by posting eight consecutive higher highs on its monthly chart. It’s been ten years since we last saw the S&P post eight higher monthly highs, and it’s only occurred a total of nine times since 1950. While the sample size is too small to be considered statistically significant, the stock market’s performance over the next 1,3,6 and 12 months has been remarkably consistent in all previous occurrences…

S&P Performance 1,3,6 & 12 months after Eight Monthly Higher Highs
11/30/09… S&P ???
05/28/99… S&P +5.5%, +1.4%, +6.7%, +9.1%
08/31/95… S&P +4.0%, +7.7%, +14.0%, +16.0%
05/30/86… S&P +1.4%, +2.3%, +0.8%, +17.3%
03/31/83… S&P +7.5%, +9.9%, +8.6%, +4.1%
05/31/67… S&P +1.8%, +5.1%, +5.5%, +10.8%
06/28/63… S&P -0.4%, +3.4%, +8.1%, +17.8%
07/31/58… S&P +1.2%, +8.8%, +17.4%, +28.2%
05/28/54… S&P +0.1%, +2.2%, +17.3%, +29.9%
02/28/50… S&P +0.4%, +9.1%, +7.0%, +26.6%

One other indicator I didn’t get a chance to touch on Friday is the long-term chart of new 52-week highs on the NYSE. Pull up the current chart and notice that we recently saw two sessions with over 400 new highs and two other sessions with nearly 400 (>395). That qualifies as a cluster in my book, which is a bullish long-term development. The 400 level has consistently represented a high reading over the last 40 years. When this level is exceeded, it’s obviously a sign that we’re in the midst of a strong uptrend. But more importantly it signals that the uptrend is likely to persist. Readings over 400, especially a cluster of more than one in a short period of time, usually coincide with a momentum top. While the market will usually enter into a consolidation phase after a momentum top for a period of months, the rally invariably resumes over the next year. The table below lists every occurrence since 1970 in which new 52-week highs exceeded the 400 level on more than one occasion in a 20-day time frame…

Cluster of 400+ new 52-week highs
10/19/09… S&P500 ??? one year later
12/05/06… S&P500 +4.5% one year later
03/04/05… S&P500 +4.1% one year later
11/05/04… S&P500 +4.7% one year later
09/03/03… S&P500 +8.8% one year later
06/02/03… S&P500 +16.1% one year later
06/13/97… S&P500 +23.9% one year later
02/21/86… S&P500 +26.4% one year later
10/11/82… S&P500 +26.2% one year later

The Last Hour indicator fell 156 points Monday given the combination of a strong first hour and flat last hour performance, suggesting the recent downtrend is reasserting itself. If that’s true, it will ultimately have bearish implications when the Last Hour downtrend stops. But if the 2005-2007 period taught us anything, it’s that this pattern of a declining Last Hour and rising stock market can continue for an extended period of time. When it stops, it should represent another significant long-term selling opportunity. But we’re not at that stage now.

Categories : Archived EOD Commentary, End-of-Day Commentary

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