Investors can find plenty of fundamental reasons to think the 10-year bull market is coming to an end, with retail fund outflows, crashing yields, and the destruction of globalization all perfectly capable of signaling the next recession. However, technical price structure may offer stronger clues to market direction as we near the end of a prosperous but turbulent decade. And right now, this arcane venue is flashing warning signs that could translate into much lower stock prices.  

Let's look at three technical elements that predict the S&P 500 has topped out or will top out in coming months. All revolve around perfectly placed 2019 price action and broad brush pattern readings asserting that the rally has reached a level that can't be sustained in the second half. What these numbers don't reveal is the ultimate downside if bears resume control of the ticker tape, especially after more than nine months of binary price swings.

S&P 500 Megaphone Pattern

Chart showing the formation of a megaphone pattern on the SPDR S&P 500 ETF (SPY)
TradingView.com 

The SPDR S&P 500 ETF (SPY) stalled at $287 in January 2018 and sold off to $253. The uptick into September added just seven points, stalling at $294 before selling off into December's 20-month low at $234. Ominously, the fund just mounted the September high and reversed at the trendline of rising highs, while the sequence of highs and lows since January 2018 completes the outline of a bearish megaphone.

This pattern, which is also called a broadening formation, indicates broad instability due to the expanding trading range. That range has now stretched to about 65 points, which adds considerable risk to long positions taken at these lofty levels. More importantly, a decline to range support will likely carry much further, with the bottom of the megaphone pattern now stretching below $220.

Magnetic 3,000

S&P 500 futures traded above 3,000 for the first time in history on July 3, encouraging bulls to pound their desks about future upside. However, big round numbers and historical milestones frequently transform into bearish gauntlets because they encourage short sellers to open aggressive positions and shareholders to take profits. Starting with the Dow Jones Industrial Average's 16-year effort to mount 1,000, round number resistance has taken heavy toll on bulls who choose to ignore the psychological power of these levels.

In more recent history, the S&P 500 traded above the 1,000 level for the first time in 1998, setting off a prolonged testing process that carved two secular bear markets before the contract cleared resistance 11 years later. And it traded above 2,000 for the first time in 2014, yielding a prolonged correction that didn't end until the November 2016 election, and we still don't know if the market is done with the price level.

Disappointing Mr. Dow

Charles Dow insisted that uptrends are confirmed in two ways. First, a security needs to post a series of higher highs and higher lows. And second, when dealing with multiple indices, they need to post new highs in tandem. According to this methodology, the S&P 500 isn't trending higher because price action lacks a significant higher low off the December low, which remains untested. Of course, some will argue the June low constitutes a higher low, but that minor downturn fails to impress as a test of the big December low.

The Invesco QQQ Trust (QQQ) matches the S&P 500's price structure in the past 18 months but is still trading under the April 2019 low, while the Russell 2000, Dow Jones Transportation Average, and other major benchmarks struggle within easily visualized trading ranges. Taken together, Charles Dow would be unimpressed, telling his readers in The Wall Street Journal that the broad market remains stuck in the trading range that started in early 2018.

The Bottom Line

Three broad-stroke technical observations suggest that the 10-year bull market may be coming to an end.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.