Thursday, July 3, 2008
Expected Stock Market S&P 500 Bottom using Long Term (8 year) View and 50% Retracements
Many people are saying that the Stock Market (as represented by the S&P 500 index) is in Bear Market territory, being down over 20% from it's recent high of 1576 (today, the S&P 500 is at 1261. The annotated chart above is from March 2008, but it still shows important levels).
Where's the bottom?
In technical analysis (analyzing the stock charts), there's a school of thinking that uses Fibonacci Retracements. In nature and in the stock market, the ratios of 61.8%, 50% and 38.2% are important levels. If we take any uptrend or downtrend in the stock market, if we look at the retracement levels (the levels at 61.8%, 50% and 38.2%), these levels often coincide with resistance and support levels.
On March 24, 2000, the S&P 500 hit an intraday high of 1552.87. During that last bear market, the S&P 500 then lost almost 50% of it's value to an intraday low of 768.63 on October 10, 2002.
The most recent high today was set around with an intraday high of 1576 on October 11, 2007.
Over the last several months, the S&P 500 bounced nicely around the 1270 level, which coincides with the 38.2% retracement from the lows of 2002.
Now, it would appear that the S&P 500 could go lower. The 50% retracement from the 2002 S&P 500 lows would be 1172, and 1077 would be the 61.8% retracement.
Looking at the chart above, we also notice a lot of congestion from 2003 to 2006, in the range between 1077 to 1267. This is a good sign that we could find stronger support in this region.
Maybe 1077 could be a good lower target on the S&P 500.
In addition, many sources claim that the average bear market decline is 30%. If this is so, then a 30% decline from 1576 would give us an S&P index value of 1104, very close to the 1077 S&P 500 61.8% Fibonacci Retracement.
The S&P 500 longer term bottom looks to be around 1077 to 1172 based on the scenario above.
Of course, we can monitor the situation of the S&P 500 at each support and resistance level.
Today's S&P 500 Chart, Long Term View
Today's Three Year S&P 500 Chart
Original Article which used the Annotated Chart Above