In examining the three year chart of the S&P 500 index (SPX) there appears to be potential changes in the behavior of the SPX over the past few months as indicated in Figure 1 below.

 

Figure 1: Annotated SPX chart (SPX chart provided courtesy of stockcharts.com)

For about the first two and a half years of this three year chart the SPX was in a strong uptrend as indicated by the green line in Figure 1 above. This period of time was characterized by what I will refer to as “checkmark” shaped recoveries in which drops from previous highs were followed by higher highs (see blue checkmarks above the green uptrend line).

Since the Summer months of 2015, however, a different pattern appears to be emerging suggesting that the SPX might be in the beginning stages of a downtrend as indicated by the red line in Figure 1 above. I ponder whether the future might be characterized by “reverse checkmark” shaped recoveries in which drops from previous highs are followed by lower highs. We might already be seeing hints of this (see the two blue reverse checkmarks below the red downtrend line).

If the red downtrend line above is confirmed we could see a drop in the SPX of 10% or more from where it is today. Thus, we might be entering a period of time where we’ll start seeing the lower highs and lower lows which are characteristic of downtrends. As such, it might be wise to proceed cautiously and to manage your risk. I’ve written several articles on how to effectively manage risk (click on “Financial Planning, Management, and Investing Related Posts” on the sidebar to the right or below, depending upon which device you are using, for helpful tips on managing risk and how to become a solid investor overall).

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