Completing the Double Top Formation – SP500 Ultimate Bottom

Posted by Tony on June 26, 2009
1. Weekly Market Analysis

Tony Sun: Founder of KhronoStock.com

Just like Glenn Neely of NEoWave made his public service announcement regarding SP500 falling well below 500 in the next six months, I would like to make a similar announcement. However, I guess my announcement is more illustrative and colorful.

Once again, this is simply a public service announcement. Please do not take it as any investment advice and as always, nothing is 100% accurate. However, for subscribers of KhronoStock PRO, I am also justifying my position based my analysis of the current valuation disparity of the SP500 index.

What I am going to talk about is the obvious double top formation of the SP500. However, I have seen very few detailed analysis about this formation and almost no analysis that provides a concrete target assuming this formation completes itself.

All my comments are based on the graph that I constructed below for the general public.



The reversal pattern of SP500’s uptrend started since September 1st of 2000, where the index formed its first top at 1530.09. After the first top, the index found a medium term bottom on October 10th of 2002 at 768.63. This low is the confirmation point of the entire double top formation. The index in turn made a run from October 11th of 2002 all the way to October 11th of 2007 with its 2nd top formed at 1576.09. Since October 11th of 2007, the index has been on the path of a huge decline that finally stopped at 666 on March 9th of 2009.

The key here is that the decline of the second top decisively pierced through the 768 confirmation point back in 2002. Because of this, the probability that the current huge double top formation won’t complete itself is only about 17% making the probability that the formation completes 83%.

So why should we be so sure that this is indeed a double top formation that is in the final stage of completion? There are several important factors that confirm this for us.

1. Two distinct tops that appear at approximately the same price level (
- This is exactly the case. The first top at 1530.09 and the second top at 1576.09 is exactly 3% from each other. The two tops are highly distinct.

2. Tops should have significant time between them (more than 1 year).

- This is exactly the case. The time between the two tops is over 7 years.

3. Price closes below the confirmation point during the reversal

- This is exactly the case as the index pierced well below the confirmation point reached during October of 2002.

4. Volume made during the second top should not be significantly higher that of the first one.

- This is not the case but this point is not that relevant to an index in my opinion but rather it’s more relevant for a stock. Of course the volume on the index is going higher as time goes especially markets became so interconnected globally and the United States was flooded with liquidity for the past 20 years with the buildup of the financial bubble.

5. Pullback after the breakout of the confirmation point

- It is more common for the price to pull back to the confirmation level and then continues drift lower. The current situation is that the pull back well surpassed the confirmation point at 768. However, I argue that pull back to the 950 does not violate any rules and in fact it is reasonable. 954.28 is the initial top of the down trend reversal back in 2002 before the index came close to retest the 2002 low and started its climb to the second top. 1000 is also roughly the 38.2% retracement from the peak of 2007. Thus, a pull back towards either of these two levels was definitely a possibility and that is exactly what happened.

How is the target of 365 arrived?

The calculation is pretty straightforward. The height of the double top formation from the confirmation point of 769 to the higher of the two tops of 1576.09 is 807.45 points.

Normally, this would mean that Sp500 can decline another 807.45 points below the confirmation point. As funny as that sounds, I don’t think SP500 would go to zero.

Instead, another more reasonable alternative is that we take half of the 807.45 height and subtract that from the confirmation point. Thus, 768.63 - 403.73 = 364.9

What are the catalysts for the next phase of the decline and what is the significance of 365?

While this is more of a subscriber question, the obvious fact is that perhaps the entire growth that United States experienced since the 1990s is probably fake (SP500 was in the 300s during the early 90s), fueled by borrowing and consumption rather than producing. US has been relying heavily on emerging markets such as China and India for produced goods. Thus, there was no organic growth.

This fact is further exacerbated today with the further spending and money pumping into the banks and the multi-billion dollar stimulus packages.

The simple truth is that no one can spend its way out of debt. What is happening in the United States today and actually around the globe is similar to a person who borrows one credit to pay another. In the process, nothing is actually paid but simply delayed with interest continues to accumulate. This tactic can only provide temporary mental relief but the person’s debt is actually getting worse not better.

I hope this public article is somewhat helpful and makes sense.

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