In fact, it was an island within island, which may have never occurred before.
The decision support engine flashed warnings that if the Nasdaq 100 closed under 4500, the objective picture would turn immediately bearish, with at least a test of 4350, plus or minus 50, but more likely 4100, plus or minus 50, in very short order. Worse, the pattern eventually points to at least a test of the 2011 low near 2500, plus or minus 500 (a 45% decline from current levels).
Here's the monthly bar chart of the S&P 500, which the DSE has just flashed a warning on. You should exit long stock exposure upon a close below the July low of 2044. This is because a break of that level would trigger a likely test of the area around 1780, plus or minus 50, which is the range between the two spike lows of 2014.
Why? A key component of the DSE is now in the same position it was in leading into the 2000 and 2007 peaks. This is the bearish divergence in the stochastics vs. price. Notice how the higher price highs of the past couple of years have diverged from the lower stochastic highs? This is shown with the bold green lines in both panes. Additionally, the current scenario is doubly similar with that of 2007, as the bold blue lines in both panes show. These two instances show the final year of each rally has steepening price acceleration vs. steepening stochastic divergence vs. the period of the green lines.
The yellow columns following the 2000 and 2007 divergences show the "effect" parts of the cause/effect relationship. The current situation is the third time in 15 years that the setup has occurred. After the first time, into the 2000 peak, the effect was a 34-month decline of 45%. The second time, into the 2007 peak, it was a 16-month decline of 55%. The yellow column at the right contains the similar effect if the relationship matches the first two. An average of those two would be a 50% decline, which applied to the current price implies a test of the 1050 zone in the S&P 500 in the next few years.
However, more ominous (as if 1050 isn't ominous enough) implications exist, as both previous crashes visited the high end of the light green support box: 720, plus or minus 50. Therefore, given the Nasdaq 100's recent formation and warning, this condition in the S&P 500 should not be taken lightly, as the support level given above as 1780, plus or minus 50, may only be the place where the initial bounce takes place in an ongoing series of lower lows and lower highs for the coming few years.
Below this initial support zone are the double tops of 2000 and 2007, near 1550, plus or minus 30. Then, the zone between the 2010 and 2011 spike lows, or 1050, plus or minus 40. Notice this is the same level that would correspond to a 50% decline from current levels.
Oh, and the Nasdaq Composite was the only U.S. index to make a solo high in July. This creates a similar topping analog to the January-March 2000 and October 2007 peaks, when the Nasdaq indices were the last to peak then, too.
How scared should investors be about another financial disaster? the DSE warns that we should all be very scared! Let's be aware of this history lesson, so we don't have to hear George Santayana's words ... again!
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.