Back in 2007 the S&P500 peaked, pulled back and then made a V-shaped recovery to a new High before the great decline that was to become know as the Global Financial Crisis (GFC). The index today, against a backdrop of Covid-19, recently peaked at a new High, pulled back and has made a V-shaped recovery to peak at a new all time High. Sound familiar? The maxim goes that ‘history may not repeat itself but it often does rhyme’. So, what now for the index? In this post I describe what I will be looking for on the chart of the S&P500.
S&P500 weekly: This screen shot is of the S&P500 from late 2007. Note the following features about price action on this chart:
- new all time High in July 2007
- a pullback
- a V-shaped recovery
- a new all time High in October 2007.
Following the V-shaped recovery and new all time High in October 2007 there was a large bearish weekly candle. This formation is one of a bearish-reversal Evening Star pattern and would have been some warning of potential for weakness:
S&P500 weekly: this screen shot is of the S&P500 showing the decline of the Global Financial Crisis (GFC) through 2008. That bearish-reversal Evening Star ended up being a great clue!
S&P500 weekly: this is a current screen shot of the S&P500. Note the following features about price action on this chart:
- new all time High in February 2020
- a pullback
- a V-shaped recovery
- a new all time High in August 2020.
This is exactly the same pattern of events as for the index back in 2007, prior to the Global Financial Crisis! The big question is now whether history will repeat itself? I will definitely be watching the S&P500 weekly chart for any bearish-reversal patterns that night evolve.
Any developing S&P500 weakness would bring the 3,400 level back into focus as this was recent S/R:
Any pullback on the S&P500 weakness would bring have me looking at Fibonacci levels for clues about potential bearish targets:
The 2,700 is an example of previous price reaction and is near the weekly 61.8% Fibonacci so this would be the level I would monitor if weakness develops:
VIX weekly: the other metric I keep an eye on is the VIX. The VIX has been in a recent bullish-reversal descending wedge but momentum remains very low for the time being. Watch for any uptick with momentum above 20 and for any VIX move back above 30 as this would likely support weakness / vulnerability on the S&P500:
Final thoughts:
The uptrend with the S&P500 remains intact for the time being and may continue to do so. There are parallels with price action from back prior to the Global Financial Crisis though so some caution, at the very least, would be prudent. To help me assess for any potential S&P500 weakness I will be monitoring:
- the S&P500 weekly chart for any new bearish-reversal weekly chart patterns.
- the S&P500 3,400 S/R level.
- the 30 level on the VIX.