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

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