Let’s assume that I’m right and the SPX has its first 5% plus pullback in 2013 over the next couple months (given the high of 1596, 5% or more gets us to below 1520 in the SPX). What would such a pullback look like?
Looking back at the previous pullbacks in this 4 year bull market run, they are mostly similar with one glaring difference. Here is the 4 year weekly chart with the local topping patterns circled in red:
Of the four major local tops, only the Apr 2010 top that resulted in the flash crash was not a multi-week topping process. Of course, there is no rule that says that the market must behave like it did before. But I do think that price action generally has inertia, and must usually be slowed down to be turned around, especially for tops (less so for bottoms, which are more emotional).
Having said that, the real debate in my mind is whether the past 6 weeks does represent a sufficient “slow down” topping process, as the index is essentially unchanged in that period, even though last week’s new all-time high popped up out of the range. In short, if the topping process is indeed 6 weeks long already, then we’re much closer in time to the more volatile portion of the pullback, when the bulk of the down move happens in a week or two. If we have another month of topping to do, then it could be a frustrating churn for both bulls and bears.
For some perspective on the depth of the pullbacks we’ve seen over the past 4 years, Bill Luby at the VIX and More blog had a good chart detailing all of the pullbacks we’ve seen in that period:
My own expectation is that we do see a deeper pullback based on all the indicators I’ve detailed over the past few weeks. In the meantime, 1530-1540 is all-important support for the S&P 500.