SP500 Correction Is Imminent

In my February post I noted that stocks were not overvalued at the time and that there was still room for some more upside. However, as of Oct 2017 end of month, with a confluence of two very important (technical) events, that is no longer the case, at least not from the technical perspective.

SP500 index weekly chart with upper channel boundaries, incl. EOD 2017.11.01

As shown in the chart above, last month the SP500 index hit and closed outside its upper channel bound.  The other simultaneous event was that it also first hit 2533.62 level (2017-Q2 seasonally adjusted GDP of $19,250 bn * ~131.62% / 10) and then two weeks ago it hit 2565.93 (2017-Q3 seasonally adjusted GDP of $19,495.48 bn * ~131.62% / 10). The 131.62% ratio is 78.6% retracement of the SP500 index per seasonally adjusted GDP (in bn) ratio move from 2000-Q1 high at 154.83% to 2009-Q1 low at 46.36%.

SP500 index relative to quarterly seasonally adjust GDP (in bn), incl. 2017 October (Q4) price action
SP500 index weekly chart with potentially untested 2007 yearend trendline breakout (blue)

The only technical event still pending is testing the trendline shown above, that was pierced through in the last days of 2007 but has never been tested by a move of the same order of magnitude. If the present rally is after testing this trendline prior to a “major” correction, then further upisde to touch the trendline at 2634+ points is to be expected, with absolute target moving upwards along with the ascending trendline as more time is required for the price to reach it.

In any case, the correction involved with or without first testing the said trendline should eventually hit the mean (red) trendline in a 20%+ move downwards and in doing so erase the entire Trump post-election move and probably fall below 2000 level only upon which the index will most probably bounce and continue the rally to its long term target above 3009 level.

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Author: damir

damir at yellowblackflag dot com