Published March 2013 in the magazine: Macau Business
Stock markets may soon drop sharply, if trends uncovered by technical analysis hold true
Trouble ahead for Stocks
by André Ribeiro
Technical analysis of chart patterns is a tool widely used in the world of finance. Researchers make use of past market data, primarily price and volume, to forecast future trends. While some impugn the reliability of technical analysis, reality has repeatedly shown that it is a dependable tool. What it tells us about this year is far from good news.
Technical analysis of financial market charts hints that stock prices will form a big multi-year top, which will be followed by the worst decline in years. The bear market will be sizeable and could last several years.
Looking at the historical weekly charts of the S&P 500 index and the Dow Jones Industrial Average from 1990 until now, we can clearly see the formation of what is called in technical analysis a “broadening top” pattern.
A broadening top, also known as a “megaphone pattern”, frequently occurs in the later part of an over-extended bull market. It comprises three peaks, each higher than the last, and, between them, two troughs, the second lower than the first. A broadening top ends with a long, steep drop after the third and last peak.
The typical result is economic recession or depression. Analysis shows that most of the big crashes in stock markets in the past 100 years have followed this pattern.
The trend is clear in both the S&P 500 and the Dow Jones Industrial Average charts. They show the biggest broadening top pattern seen over the past century, which has been developing for more than two decades.
This broadening top trend seems to have begun its final climb this year. When it ends, stock prices are likely to plunge, deeply.