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World markets have cascaded through incredibly big trends in the last two years. The massive swings in equities and the commodity futures have been especially breathtaking, with bubbles, crashes and recoveries forcing traders and investors to navigate a nearly alien environment characterized by historic danger and risk.

For example, we know that American retirement funds lost nearly $40 trillion in 2008, victimized by the near-collapse of the world banking system. Sad to say, most of the folks taking these massive losses reallocated their capital into cash and more conservative vehicles ... just in time to miss this year's gigantic recovery rally.

None of this is going to sit well in future years with Joe Public, whose disgust of Wall Street is stuck at critical levels despite happy numbers on the major averages. It doesn't matter right now because of the big rally, but it will matter when liquidity starts to dry up and too little cash starts to chase too many stocks.

When will this giddy rocket ship start to flame out and head back down to planet Earth? In times of euphoria or panic, zooming out to the monthly charts and checking out major levels of activity can offer an objective perspective we're so sorely lacking in our daily dose of financial media mayhem.

The

S&P 500

ground out a massive double top between 1996 and 2008, breaking support at the 2002 low earlier this year. The index dipped under 700 and then shot higher, lifting above the broken low. This signaled a 2B reversal, which is a bullish "failure of a failure" buy signal. The index is now approaching the 38% retracement of the huge downswing.

This zone also marks the 200-month moving average, which broke in October of last year. I've drawn a red line to denote the long-term level because eSignal data doesn't go back far enough. This is a major infection point that's rarely hit in the course of decades. Notably, it was the exact spot where the 2000-to-2002 bear market came to an end.

We have to go back another 20 years to 1982 to find the next test of this historic level. As it turns out, the index dipped into the moving average just before the market entered the major bull market of that era, characterized by the

Dow Industrials'

rally above 1000. So again, a dose of respect is needed because the current test may be significant.

The S&P 500 is now at the psychological 1000 level. I don't expect the major indices to turn on a dime right here, but the convergence with broad Fibonacci and moving-average resistance tells us that high volatility from last year's crash has now washed out of the system, with equities nearing self-adjustment levels that more accurately represent their value.

That's just a complicated way of saying the major indices got stretched like massive rubber bands last year and have now sprung back, taking tension off the springs. These whipsaw dynamics are completely different than a fundamentally driven bull-market rally to new highs like we had in the 1990s. Rather, it's the last phase of a reactionary cycle that's finally correcting last year's horrendous events.

The Nasdaq 100 has behaved better than the S&P 500 in the last two years because it hasn't been weighed down by the financials or whipsawed by the energy sector. This index bottomed out three months ahead of the S&P 500, holding well above the 2002 low. It's moved higher this year in a steady recovery and has now reached the 50% selloff retracement.

There isn't much resistance right here, so there's a good chance the index will continue to gain ground, perhaps hitting 1800 by the end of the year. That uptick would lift price back to just under the four-year trend line broken last September. This running room suggests that index leadership, like

Apple

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, could return to pre-crash levels in the next six months.

I could take a look at the long-term charts of banks or small-caps to wrap up this discussion, but I chose the crude oil futures instead. Can you imagine what might happen to the world markets if the energy bubble reinflates in the next year, given the permanent loss of the wealth effect? Simply stated, it would kill any economic recovery dead in its tracks.

Fortunately, I don't think that's going to happen. The futures contract shows two parabolic trends -- higher from 2007 to the middle of 2008, and lower from that time into the early-2009 low. I challenge you to find another trading vehicle in any market that shows a third parabola, with price shooting back to the high.

No, it's the nature of broken bubbles to stay broken, and it will be no different this time around. The key inflection point on this monthly chart lies at the 2006 swing high near $78.50. Markets seek out these old price levels, which can then generate strong reversals. Notably, that high converges with the 38% retracement of the massive selloff.

A downswing from that level might carve out a huge head-and-shoulders pattern. Yes, I know that non-technicians have maligned this classic formation since the failure of the major indices to break down last month. This doesn't bother me, because pattern analysis is just an odds game anyway, with no certainties or absolutes.

And ironically, the pattern is more likely to work in the future because it's been dismissed by so many folks as irrelevant and nonpredictive.

At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

Alan Farley is a private trader and publisher of

Hard Right Edge

, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of

The Daily Swing Trade

, a premium product that outlines his charts and analysis. Farley has also been featured in

Barron's

,

SmartMoney

,

Tech Week

,

Active Trader

,

MoneyCentral

,

Technical Investor

,

Bridge Trader

and

Online Investor

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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