Market Is Approaching Reversal

Although technical analysis has severe limitations, it can be useful for near-term market forecasts. Judging from the chart of the S&P 500, a simple ascending channel seems to have worked well to predict index reversals between 2003 and 2007. That is true for the overall period, and also for a sub-channel in 2004-2006 (not shown). Like an object pushed along a frictionless surface, the market will keep on going in the same direction until another major force intervenes to push it in another direction. Technicals can then be useful to define the shorter-term limits of such a multi-year move.

S&P 500 2003-2007

S&P 500 2003-2007

Looking at the present, we can see that the index is approaching a level at the upper boundary of the channel where it is likely to reverse. Extending the channel to year end, we can say that, in a bullish scenario, the S&P 500 will end 2013 near 1,800. In a bearish one, it will fall to 1,400. That’s a wide range and therefore not a useful prediction. But it may help determine near-term reversals when the index approaches these limits.
S&P 500 2009-2013

S&P 500 2009-2013

Another technical indicator is also bearish. According to Bloomberg News, 82% of S&P 500 stocks are now trading over their 200-day average, compared to an average of 54% since 1994.
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