No matter which way you look, US equities are pressing into major cyclical channel resistance. Most broad indices – the Dow Jones Industrial Average (DIA) being the exception – are making their third touch (fourth for QQQ) at the top of a rising channel entered 5 years ago in the dark days of October 2008 and last met in Summer 2011, 925 days ago.
Can stocks meaningfully correct here? It’s a scenario (far too) widely dismissed as “Don’t Fight the Fed(-Supported Market)” capitulation takes hold. But consider: stocks have a long way to go before their primary trend would be broken. For example, the S&P 500 (SPY) could plausibly threaten a deep correction (defined as a >-10% decline from peak to trough) by a drop to the bottom of its channel without snapping its cyclical rising trend.
The alternative – slow grind higher at trend line resistance into year-end aside – is a breakout higher from the 5-Year channel inside the smaller channel underway since the November 2012 lows and traveling at a 12-month old trajectory of almost 70 degrees. This, too, is possible: but would likely carry the markers of a genuine blowoff top and be followed by volatile mean-reverting reprisal.
On the other hand, the market top preceding a catastrophic 2008-like period is disregarded by most as wholly improbable here – and that’s probably correct. But concentration on that trope by its friends and enemies alike diverts attention from a more plausible and perhaps imminent scenario: a market top – Fed or no Fed – that is medium-term bearish from channel resistance; and long-term bullish from channel support.
Russell Microcap (IWC) – Monthly: At Channel Resistance
Russell 2000 (IWM) – Monthly: At Channel Resistance
S&P Midcap 400 (MDY) – Monthly: At Channel Resistance
S&P 500 (SPY) – Monthly: At Channel Resistance
Dow Industrials (DIA) – Monthly: 5% Below Channel Resistance, At Cluster Resistance
NASDAQ 100 (QQQ) – Monthly: At Channel Resistance
Author holds net short exposure to the Russell 2000 the time of publication.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.