Wednesday, October 29, 2008

Time for a Rally to the 50 Day Moving Average of 1130?

On Tuesday, October 28, 2008 the S&P 500 had a very good day, going up 10.79% from an open of 848.92 to close at 940.51.

In a previous blog, we also speculated the S&P would re-test the previous lows.

On October 17, it appears as if we hit an intra-day low which is almost as low as the low on October 10. If we look at the SPY, the S&P 500 ETF, the SPY did successfully test the low on October 10.

The 50 Day moving average on the $SPX is 1130, and the closing price on Tuesday, October 28, is around 940. The S&P 500 is around 20% below the 50 day moving average, which is an overextended amount.

There will be a time when we do rally, and the S&P 500 will approach the 50 day moving average.

Is now the time for a tradable rally?

Today's Stock Chart

Friday, October 24, 2008

Stock Market Breakdown from Symmetrical Triangle?

In our last blog entry, the S&P 500 appeared to be in a Wedge/Symmetrical Triangle.

However, as with most patterns, we need confirmation (strong breakout with high volume above upper trend line), and the (ongoing) pattern did not turn out to be a bullish one.

However, if we generically call the pattern a symmetrical triangle, the interpretation would be a triangle, that could break either way (up or down). This pattern will require confirmation as well, with a breakout above the upper trend line, or a breakdown below the lower trend line, with volume.

Let us see how much volume there will be in the possible breakdown this morning (Futures are down very big before the market opens).

Today's S&P 500 Stock Chart

Wednesday, October 22, 2008

Possible Bullish Bottom Triangle Wedge Pattern on S&P 500 Stock Market?

Looking at the S&P 500 Stock Chart, we noticed that the S&P 500 ($SPX) may be within a bullish Bottom Triangle Wedge Pattern.

According to the Trending123 website, a Bottom Triangle/Wedge is a possible bullish reversal pattern.

"These patterns have two converging trend lines. The pattern will display two highs touching the upper trend line and two lows touching the lower trend line.

This pattern is confirmed when the price breaks upward out of the Triangle/Wedge formation to close above the upper trend line.

Volume is an important factor to consider. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when the breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about decisions based on this Triangle/Wedge."

As the website suggests, the reversal won't occur after a successful breakout with good volume above the upper trend line of the Triangle/Wedge Pattern.

As of Wednesday, October 22, 2008, we are at the bottom end of the triangle, and if the pattern holds, we may eventually get a breakout on the upside.

But as with all patterns, patterns are not guarantees and patterns can fail.

For more details of the Bottom Triangle Wedge Pattern, see the Trending123 Article on this.

Today's S&P 500 Stock Chart

Tuesday, October 14, 2008

Enjoy the Rally But We Will Revisit the Stock Market Lows

We have had a very volatile three day period, and it does look like we have put in a bottom after a classic, stock market capitulation.

  1. Thursday, October 9, 2008: S&P 500 opens at 988.42, and falls to 909.92 for a loss of almost 8%, a major drop.
  2. After market, Thursday, October 9, Before Market on Friday, October 10: Great fear, and the sky seemed to be falling.
  3. Friday, October 10: Market opens with a gap down from the previous close and opens at 902.31. Market falls intraday to a low of 839.80 (loss of almost 7%) but recovers and closes at 899.22.
  4. Monday, October 13: Market finishes capitulation as there is a massive rally, opening at 912.75 and closing at 1003.35, for a gain of almost 10%

Expect Rally for now But We Will Re-Test Stock Market Lows

We had been in extreme oversold conditions and we appear to have had a classic stock market capitulation.

We can expect the rally to continue for a while. We speculate that the rally range may reach resistance at 1077 (previous 61.8% retracement from 2002-2003 Bear Market low of 768 to top of 1576) to around 1200 or so (near other resistance).

The S&P 500 around the 1265 area is also the resistance level set during 2003.

If we look at the longer term six year view, we notice that there is a lot of congestion from 2003 to 2006. With the S&P currently at around 1003, this means that most people who bought stocks after 2003 are under water. With the recent stock market capitulation, many individuals and hedge funds and institutional investors have sold much of their stocks and may choose to unload those that they failed to unload around this resistance area.

Re-Test The Lows

Stock market bottoms do not often occur in a V shaped bottom. We expect the S&P 500 to test the S&P low of around 839. We will not know whether this bottom will hold, or whether we will start a new lower trading range.

But with the S&P Bear Market Low from the Great Dot Com Bubble at 768 (2002 to 2003), maybe the market might eventually re-test those lows too?

Let us wait and see what happens at each support or resistance level.

Today's S&P 500 Chart

Friday, October 10, 2008

Have We Capitulated Yet in the Stock Market? We may break Records. Stock Chart Included.

The US Stock Market as represented by the S&P 500 index went down 78.5 points to 909.92 for a loss of about 7.9%.

We Are Near Record Levels

By almost any metric, we are extremely oversold and near historic levels.

Even before today's big drop, by many technical (related to looking at charts, and price and volume movements and other patterns) standards, we were in extreme oversold conditions.

We could also look at how overextended the S&P 500 Market is from the 52 Week High (and minimize the extension from the 52 Week Low), and we find that we are 42.30% below the 52 week high. In a previous study looking at the S&P 500 in relation to the 52 week high and low, from 1950 to March 2008, we are at the lowest levels since the great bottom of October 3, 1974 with the record of 44.11% HOLU value (mainly how overextended the market is from the 52 week high).

The previous study found that of the 59 trading days from 1950 to March 2008 with the HOLU value greater than 30%, the average one year forward annual return was a market beating 22.13%.

Stock Chart

Previously, we thought that the S&P 500 could hold at 1077, but if the stock market breaks this level, the Stock Market would truly be in trouble. This is the case today as the market sliced easily through 1077 and is now at 909 in a very short time.

We are nearing the congestion around the S&P 500 level 768 (the great bottom from 2002-2003 after the dot com bubble crash) to 936. We might have other support areas such as S&P 840, before we could reach the dot com crash bubble low of 768.63.

Perhaps we are headed towards a re-test of the dot-com crash bottom, and maybe we may form a bullish double bottom around 768.63.

Have we Capitulated and Surrendered Yet?

Common Wisdom States that Stock Market Bottoms often occur after we have Capitulation, where everyone gives up and surrenders on the market often with a crescendo massive sell off.

Today, you could really sense great concern. After visiting a bank, I heard someone say that it is official after looking at the business news program. I hear others talk about losing much of their money.

On common business programs on CNBC, shows such as Mad Money, and Fast Money, were replaced by world wide market news.

The word "crash" is heard all over the news programs. The word "Depression" and "Recession" is thrown around by many people.

The New York Times Internet Front Page talks about the "Markets in Europe and Asia Plunge" and "Nations weighing Global Approach as Chaos Spreads" and "Afternoon Turns Dark as Stocks Plunge."

Photos of traders in shock appear over all the newspapers.

News from around the world shows that many of the world markets are losing around 5% to 10% overnight.

Business programs keep talking about more problems in the future, hedge fund redemptions and record amount of mutual funds being sold as investors show real fear.

The Dow Jones Futures are down big, around 300 points.

There's a good chance that the market could open with a big gap down and continue to sell off. The Big Gap down is good, as this could often be an initial sign of capitulation.

Typically, massive buying comes in, shorts have to cover, and we establish an intermediate bottom and a tradable rally can continue.

But with all the problems all around the world, with all future redemptions still to come, and with traders not wanting to stay long before the weekend (October 10, 2008 is Friday), will we really have the capitulation bottom on Friday October 10, 2008?

But if one is truly a long term investor, this could be a great buying opportunity, or at least a good opportunity to continue accumulating index funds or ETFs for the long term.

Many times near market tops, we often hear that this time, it's different (to justify the market continuing to go up at a fast rate). We could apply this logic near market bottoms, where people proclaim, this time, it's different (to justify a much larger stock market fall).

One day, the stock market will stop falling. And for the patient, disciplined investor, now might be a good time to start or continuing accumulating.

Thursday, October 9, 2008

Time for a Stock Market Short Covering Rally?

The Stock Market as represented by the S&P 500 has been going down for sometime and the S&P 500 is now at 970.97.

Is it time for a (short covering) rally?

The current levels appear to be low enough for some bargain hunters to step in, and the shorts to start covering, starting a rally.

  1. The S&P 500 (as of close of Wednesday, October 8) when displayed on a Point and Figure Chart , shows a Bullish Pattern, the Long Tail Down. (BULLISH)
  2. The Stocks above 50 Day Moving Average is an extremely low 1.20% (BULLISH)
  3. The Stocks above the 200 Day Moving Average is an extremely low 4.20% (BULLISH)
  4. The New High Low Index ($RHSPX) is a very low 0! (BULLISH)
  5. The Ratio of Stocks Above 200 day Moving Average to Stocks Above 50 Day Moving Average spiked to a very high 3.5 (BULLISH)
  6. The S&P 500 is overextended from the 52 week high and is down around 38%. This is a rare occasion and one year forward returns at these levels have been market beating returns. We have not been at these levels since the great bottom of 1974. The over extension is even worse than the bottoms in 2001-2003, 1987, and 1970. (BULLISH)

Maybe it is time to trade or accumulate stocks or equities for the long term?

Wednesday, October 8, 2008

One Year Forward Return on S&P 500 Stock Market Looks Historically Positive From Here

The Stock Market as represented by the S&P 500 Index had a bad day, going down 60.66 points to 996.23 for a loss of 5.74%.

Historically, today is a unique day.

Previously, this blog made a study of the S&P 500 from 1950 to March 2008 and looked at the one year forward annual return based on the S&P 500 index in relation to the 52 week high and 52 week low.

We calculated a special value called HOLU which maximizes the distance away from the 52 week high, and minimizes the distance from the 52 week low.

From 1950 to March 2008, there are only 59 trading days where the HOLU value exceeded 30%. And the average one year forward return during those 59 days was a market beating 22.13%.

Today's HOLU Value is 36.79%, with the 52 week S&P 500 low of 996.23, and the 52 week high of 1576.09.

The highest HOLU value during this period was 44.11% on October 3, 1974.

The longest time period where the HOLU value remained above 30% was from August 14, 1974 to October 9, 1974 with the exception of two days in this period where the HOLU briefly went under 30%.

Time to Accumulate?

Based on this, now might be a good time to be a contrarian and start accumulating index funds or ETFs.

However, the market could still go lower and possibly approach the record 44.11% HOLU value on October 3, 1974.

But for the true long term investor, having a cost basis around this level or lower could be a profitable move.

Today's S&P 500