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Jason Haver: S&P 500, Russell 2000, and Taoist Farmer Update


In an ever-changing market, here's one possible path equities may choose.

In a perfect world, I should now be able to resume regular updates. Of course, this is not a perfect world, but I'll go ahead and tempt fate by stating I feel 87.6% certain that there are presently no additional shocking crises lurking in my (immediate) future.  I'm still allowing 12.4% odds because, let's face it, the only constant in this world is change.  Indulge me a brief digression into an old Taoist parable that my dad has been telling me for as long as I can remember.  It goes something like this:
An old farmer relied on his horse to work his crops for many years -- until one day the horse ran away.  "We're so sorry!" his neighbors remarked, "How terrible for you!"   

"Maybe," replied the farmer. 

The next day, the horse returned, bringing three wild horses with it. "What a great stroke of luck!" exclaimed his neighbors happily. 

"Maybe," replied the farmer. 

A few days later, the farmer's son was thrown while trying to tame one of the wild horses. The son broke his leg badly. "How awful!" his neighbors lamented. 

"Maybe," replied the farmer. 

The next morning, military officials came to the village, seeking to draft young men for war. Seeing the son's broken leg, they passed him by.  "Wow," said the neighbors, "How lucky for your son!"

"Maybe," replied the farmer. 

And so on...
And with that out of the way, let's take a look at the charts. My last update (June 25) concluded that there was probably more near-term downside in store, but that it should then resolve with new highs.  That expectation was correct on both counts, though the lower near-term low was very marginal. 
For the current charts, we'll start off with the Russell 2000 (INDEXRUSSELL:RUT), whose recent peak at 1213 is practically a case study in technical analysis. 

Click to enlarge
Next is the S&P 500 (INDEXSP:.INX), which captured my May if/then target of 1978-89 and appears to be working on a fourth wave:

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Moving a little closer on SPX, another leg down would be reasonable after a reaction rally -- but in this market, bears have little in the way of guarantees.

Click to enlarge
In conclusion, over the near term, ideally I'd like to see a rally to 1978-82, followed by a decline below 1952.  Long-term, the trend remains up, so bears still have their work cut out for them before putting a dent in the big picture. Of course, as the old Taoist farmer would tell us, the only constant in this world is change. Trade safe.
Follow me on Twitter while I try to figure out exactly how to make practical use of it: @PretzelLogic.

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No positions in stocks mentioned.
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