The first chart here shows the longest time frame available using daily data on the S&P 500 (displayed here in quarterly bars), covering from 1950 to the present. The S&P 500 is in the lower pane, and the RSI oscillator in the upper.
This shows that the S&P 500 has been in a very wide consolidation since its top in 2000, and is now back up to that top. Compare this to the decade of the 1970s, the last time period of a long consolidation that contained a deep market plunge. In the early 1980s, the market broke out of its malaise and launched into a huge very long term bull market. Is that what it's about to do now?
To address this question, look at the 12-period RSI on log scale in the upper pane. I've set its period and scale so that trend lines work well in this display. Look at the first red trend line. After the market's washout in 1974, the RSI finally broke above that trend line in 1980, presaging the S&P's breakout into its new very long term bull market. Fast forward to this present era, and for several quarters now in my blog, I've been watching that second red trend line to see if and when the RSI will break above it. The second chart here expands the time scale to get a closer look.
First, look at the S&P's behavior in the lower pane. Recent news reports have all been blathering on about the comparison with the 2007 peak, but I think it's more significant to look back to 2000. The gray horizontal line's level is at the peak of the market in the year 2000. Notice what happened at the peak in 2007; although price did poke above the gray line, it quickly retreated and closed below it, which was a bearish signal, and sure enough, the market plunged to the deep low of 2009. But look at what has happend now in this 1Q of 2013; the S&P 500 not only went above the 2000 high, but it closed up there. This is a bullish signal of further upward motion. Now look at the RSI in the upper pane. It has finally broken above its trend line, just as it did in 1980.
My Conclusion
It is now more likely than not that the market is not going to plunge down to new recessions lows, but rather will enter an era of a new very long term bull market over the coming years to decade or two.
Caveats
First, this is not a prediction, rather, it's a recognition of relative probabilities, that the market's current behavior is more consistent with a coming very long term bull market than bear market.
And second, there could well be deep market pullbacks ahead on a shorter timeframe than "very long term". For example, look at the first chart here and notice what happened in the 1980 to 1982 period. After the RSI broke above the trend line in 1980, the market rose but then fell way back before hitting support and rising again. That sort of thing could happen now over the coming year or two. The market could very well fall back to one of the upper green support curves before moving up again. But it's now unlikely that it will crash down to anything near the lows it hit in 2002 or 2009.
