Saturday, July 28, 2007

S&P 500 Possible Scenario (July 27, 2007)

As of Friday, July 27, the market and the S&P 500 have been undergoing a correction. The S&P 500 is now at 1458 and many technical indicators are flashing very oversold conditions:

  1. Only 18% of S&P 500 stocks are above their 50 day moving average.

  2. Only 47.8% of S&P 500 stocks are above their 200 day moving average.

  3. The 10 day Moving Average of the Put-Call Ratio is at 1.12 (above 1.0)

  4. The ratio of new highs to new lows on the S&P 500 is only 7.4%

The closest support level is the 200 day moving average at 1448, then horizontal resistance of 1440. The 200 day moving average would be a reasonable bottom target (since we are in very oversold conditions), and this target could be reached intraday. The $SPX should have a bounce (using Fibonacci Retracements) to the 38.2% or 50% retracement which would be somewhere between 1489 and 1501 on the $SPX.

Usually, V shaped bottoms don't last. I expect the $SPX to re-test the previous lows (expected to be at the 200 day MA of 1448).

During the re-test, we can then determine whether the $SPX will continue another leg down (for the next leg in a larger ABC Correction), or, the $SPX may form a double bottom.

We can then come up with a new scenario at that point.

For Today's Chart with Info Above

Trading Advice if Above Scenario is True:

If the above scenario works out, a trader could:

  1. Cover all shorts now.

  2. Get ready to go long on the S&P 500. This could occur very quickly and occur intraday.

  3. Be prepared to play the bounce to 1489 to 1501 then sell the long position, and go short on the S&P 500.

  4. Cover the short once the $SPX re-tests the previous lows.

If one is more of an investor with a longer time frame (multiple years):
  1. Cover all shorts now.

  2. Create a wish list of stocks to go long, and get ready to buy in the very near future (even on Monday!)

  3. Start a 25% position on selected stocks.

  4. After the bounce, look for the re-test. If the $SPX re-test is successful, you can add another 25-50% position on your favored stocks. But watch out if there is another leg down! The $SPX could fail on the re-test.

Jim Cramer's thoughts on Bottom

Jim Cramer in this article, talks about the bottom. One of his indicators is a proprietary S&P 500 indicator that is at -6.5, an extreme reading which has only occurred twice in seven years. He says that the bottom usually occurs within 48 hours.

But even if we do get a bounce, beware of the re-test back to the previous lows. We'll determine what to do after the re-test of the lows.

Otherwise, watch out below. Next support levels on $SPX are 1420, 1410, 1380.

WARNING: You can lose money in the stock market. Please do your due diligence.

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