The Age of Irrational Exuberance

The Age of Irrational Exuberance

By Springheel Jack

I’ve been expecting at least a short term swing high on SPX in the area between the April 2012 high and the 1440 area SPX pivot resistance, and we may have seen that last week. On SPX the close on Friday was at possible declining channel resistance and the retest of broken rising support from 1329. If SPX continues down then there is a small head and shoulders pattern in play with a target at rising channel support from the June low in the 1375 area.

However there is often a sharp spike down before a true swing high on SPX, and if SPX breaks up on Monday I have sketched in two more options for making a more definite high on the 60min chart. The first option would be a second high in the 1420-1445 area to make a double or M top, and the second would be a high in the 1435-1445 area to make the head on a larger head and shoulders pattern. Both of these options involving a higher high would have targets clearly below rising channel support from the June low, and would therefore be a more definite swing high:

 

 

I was looking at the longer term TLT chart last week and I’ll follow up on that this week with my very long term TYX Monthly chart this week. This is the chart of 30yr Treasury Bond Yields from the mid-80s and shows the amazing 27yr declining channel in bond yields that has defined most of the 31yr bull market in bonds since 1981. The next channel target is in the 15 (1.5% yield) area but you can see that there are a couple of decent bottoming options in the medium and longer term.

The medium term bottoming option is that an inverted head and shoulders pattern is forming with the neckline in the 35 (3.5%) area and the target is at declining channel resistance in the 45 (4.5%) area. The next moves would be a test of the 35 area to complete the head, then a sharp retracement to make the right shoulder, then to play out to the 45 area target.

The long term bottoming option is that a double or W bottom has formed at the 2008 and 2012 lows. the high between the lows is in the 48 area, and on a conviction break over that the target would be at resistance in the 71.6 to 72.3 area. A conviction break over declining channel resistance in the 45 area would of course signal the end of the long bull market in bonds:

 

 

Lastly today I’d like to show another very long term chart, this time of the SPX since 1980. I’ve marked on the chart Greenspan’s 1996 Irrational Exuberance speech where, after a rise in equities of almost 700% since 1980, he mused on the difficulty of identifying when asset prices had become detached from reality. Initially the markets fell in the expectation that the Fed might take some action to rein in soaring asset prices, but then when it became clear that wasn’t going to happen, equities broke over resistance and stepped through the looking glass into the Tech bubble of the late 1990s:

 

 

What are the shorter term take-aways from this chart? Firstly that the weekly RSI is showing negative divergence on a scale that has generally been seen in the past near major highs. Equities might break through that as they did in 2005, but it is a warning signal. Secondly there is a decent resistance trendline from 2008 with resistance currently in the 1450 area, slightly above the 1440 area SPX pivot, and that range between that pivot and that trendline is the key area that SPX must break over to have a chance at testing the 2007 highs.

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