Stock Market S&P 500 Long Term Bottom Target: 450 to 600, a Drop of 25% to 44% from Here

Previously, we offered analysis that the US Stock Market could be in trouble if the S&P 500 goes below 768.

The S&P 500 recently went to an intraday level of 741 but successfully tested the major low of 768 set 6 years ago on October 10, 2002.

It is still very possible that the S&P 500 could re-test (at least once) 741/768, and the S&P 500 could break below this level.

At this point, where would a potential long term bottom be?

In the Dire Consequences if S&P 500 goes below 768 post, we hinted that a long term bottom might be reached around the S&P 500 level of around 500.

The Long Term bottom could be around 450 to 600 on the S&P 500 over the next several years, a drop of around 25% to 44% from here (S&P 500 Level of 800).


A. No Major Support Until Around S&P 500 level of 450 to 500.



From the chart, aside from seeing the major support area of 768, we also notice that from 1995, the slope of the Chart increases to an unsupportable level, ending up in the Bubble of 2000. The Stock Market had no time to rest from 1995 to 2000, and there was no time to consolidate. This lack of stock market consolidation does not provide any good support for the market as it falls below the 768 level on the S&P 500. This could potentially mean a large drop (over years?) if the S&P 500 drops below 768.

The S&P 500 Level in late 1994 right before the S&P 500 rocketed upwards at an unsustainable rate is around 450.

This sets up the lower end of the long term bottom range of 450 to 500 on the S&P 500.

B. Reverting Back to 60 Year Trend Line Suggests Level around 400-500



Looking at the 60 Year Chart of the S&P 500, we notice the 60 Year Trend Line hits the S&P 500 level of around 400 at this time. If we look forward over time, this trend line would approach 450 to 500, which coincides with the predicted long term support level above.

C. Five Month Fibonacci Grid Suggests Bottom of 600



When we look at the five month chart, we place a Fibonacci Grid and align the top to a recent high (of around 1265), and align the 61.8% and 38.2% line to coincide with the recent trading range between 850 and 1010. The lower range of the Fibonacci Grid suggests a potential bottom.

This S&P 500 level is 600, setting the upper range of a longer term S&P 500 Bottom.

D. 60 Year Fibonacci Retracement: 50% = 770; 38.2% = 588

Early in 1950, the S&P 500 was around 17. At the top of the market, the S&P 500 reached around 1560.

If we use the Fibonacci Retracement Rule of 50%, that would lead to the S&P 500 Retracement of 770, which coincides with the recent major bottom of 768 that was achieved October 10, 2002, and very recently.

If we use the Fibonacci Retracement Rule of 38.2%, that would lead to the S&P 500 Retracement of 588, which is within the 450-600 range using previous methods of analysis.

E. Chartist Louise Yamada Opinion: 400 to 600

On a recent CNBC Fast Money episode, Chartists Louise Yamada predicted an S&P 500 bottom of 400 to 600. This coincides with the analysis so far.

F. Secular Bear Market, Cyclical Bull Market

Television Personal Financial Advisor Suze Orman predicted in 2004 that in 2000, we started a Secular Bear Market (long term Bear Market of around fifteen years), and around 2003, we started a cyclical Bull market (short term market lasting around two to four years), that would eventually end, and hit near the lows of 2002.

Her prediction was accurate.

If her prediction continues, we will continue the Bear Market until around the year 2015 or so.

G. Major Demographic Shift Ahead

In 2010, there will be a major demographic shift as the first Baby Boomers reach 65 years of age, and may retire and take more money out of the stock market. More Baby Boomers will do the same in the years following 2010.

This may put pressure on the U.S. stock market and may be in line with the long term Secular Bear Market theory starting in 2000 and ending around 2015.

Five Month S&P 500 Stock Chart

Sixteen Year S&P 500 Chart

Stock Trading Ideas after Stock Market Drop Today

The S&P 500 went down 52.54 points today, to close at 806.58, a drop of 6.12%.

The S&P 500 broke below previous support of around 839 and 818.

We previously wrote what could happen if the S&P 500 breaks below 839, or even if the S&P 500 breaks 768.

This can be a very scary market, but for traders, this can be a great market. Traders like volatility. For many years, the US Stock Market had been trading at below average volatility, and it was just a matter of time before the stock market reversed itself and entered a high volatility phase. We are currently experiencing this high volatility.

Using SPY as Trading Vehicle

One trading vehicle is to go long (profit when stock goes up in price) or short (profit when stock goes down in price) the SPY, the S&P 500 ETF

The SPY attempts to mimic the S&P 500 index, but it is not a perfect match. In general, the SPY is currently at $81.50, and the S&P 500 ($SPX) is at 806.58, an approximate ratio of 1 to 10.

Using Inverse ETFs to Trade

Alternatively, you can use the inverse ETFs at Proshares.com.

Some of the products include:

1. SH: ETF that goes up 1x if the S&P 500 goes down 1x, and ETF that goes down 1x if the S&P 500 goes up 1x.
   
2. SDS: ETF that goes up 2x if the S&P 500 goes down 2x, and ETF that goes down 2x if the S&P 500 goes up 2x.
   

So rather than shorting the SPY, you can go long on the SH. Of course, the behavior and value of SH differ from SPY.

Trading Ideas After Stock Market Drop Today



The S&P 500 broke below previous support of 839 and 818 (on an intraday basis), and it appears as if we are in a breakdown and the SPY is trying to find a trading range.

We expect the upper band of the trading range to be previous support at around 839. It is known that what was once support now becomes resistance.

On the downside, it appears that 768 appears to be the next major bottom. This 768 bottom was reached October 10, 2002, 6 years ago, in a major bottom after the 2000-2002 Bear Market.

So if the S&P 500 ever reaches 768, we do not expect it to break through 768 right away. It should respect the 768 major support at least once.

So how can we formulate a possible trading plan?

A) First Trading Idea: Short SPY here

This plan refers to trade A) in the chart above.

We know upper resistance on SPY is around $83.50. And since the SPY recently broke down below this (ideally, with high volume), the short term trend appears to be down. In fact, it is possible that the SPY can shortly re-test resistance at $83.50 before continuing down.

The first trading idea is to short the SPY (or go long on the SH), around these levels.

Where is a possible bottom?

As we discussed earlier, $76.80 is a good target on the downside, and a single re-test of the October 10, 2002 lows should be in order. This is a major bottom.



We can cover the short near this area.

B) Second Trading Idea: Go Long SPY at $76.80

Since we expect at least a single re-test of the $76.80 levels, we can cover our previous short, and then go long SPY.

Where can we cover? We do not know how far the rally can last, but the resistance area of $81.80 to $83.90 area would be good bets.

C) Third Trading Idea: Short SPY after rally to $82

Once the rally runs out of steam, we can sell our previous SPY long position, and go short for the estimated re-test of the SPY low of $76.80.

We do not know whether the re-test at $76.80 will succeed or not, so it is best to cover the short around this area.

D) Fourth Trading Idea: If SPY breaks $76.80 to the downside, Short SPY!

If the SPY finally breaks the major support of $76.80 to the downside, it is time to short SPY because this would be a very bad scenario for the market, but an opportunity for you to profit.

Use Limit Orders, Stop Orders and Trailing Stops

This is a very fast moving market. If you cannot monitor the stocks every moment of the day, you can use limit orders, stop orders and trailing stops.

Today SPY is at $81.50. Let's say during this time, you put in a Limit Order to Buy at $76.80 (good for 60 days).

SPY starts going down (your order has not been executed at this time) but has not reached $76.80. Then several days from now, SPY reaches $76.80.

After purchasing SPY at $76.80, you then put in a Stop Order to Sell at $75. You expect SPY to bounce at $76.80 and go higher. If this happens, this is good, and you eventually take your profit.

But there are times when you are wrong. SPY could continue falling below $76.80 and when it hits $75, your SPY order to Sell will be active.

Is it possible that SPY reaches $75, hit your stop order to sell, then start climbing upwards again? Yes, this can happen. But it is good to remain disciplined, and stick to the rules.

You can also use Trailing Stops as a technique to limit losses, and to protect profits.

Let us Monitor the Situation

Of course, we should monitor the situation at each stage, and we should remain disciplined.

Today's SPY Chart

Today's S&P 500 Chart ($SPX)

Dire Consequences if Stock Market S&P 500 Breaks Below 768.

Monday, November 17, 2008: The S&P 500 is at 850.

The Stock Market as represented by the S&P 500 has been holding the support level of 839 successfully.

Looking forward, what if we break below 839?



The next major support is at 768, which was established 6 years ago on October 10, 2002, and the stock market is most likely going to bounce around this major support area.

But can we think the unthinkable?

What if the S&P 500 Breaks the 768 Level?

If the S&P 500 Breaks 768, the Stock Market is in big trouble, as there is no solid support until the level of 500 on the S&P 500, a drop of 35% from 768, a drop of 41% from 850.



From the chart, aside from seeing the major support area of 768, we also notice that from 1995, the slope of the Chart increases to an unsupportable level, ending up in the Bubble of 2000. The Stock Market had no time to rest from 1995 to 2000, and there was no time to consolidate. This lack of stock market consolidation does not provide any good support for the market as it falls below the 768 level on the S&P 500. This could potentially mean a large drop (over years?) if the S&P 500 drops below 768.

View from a 60 Year Chart



Looking at the 60 Year Chart of the S&P 500, we notice the 60 Year Trend Line hits the S&P 500 level of around 400 at this time. If we look forward over time, this trend line would approach 500, which coincides with the predicted long term support level above.

Today's 15 Year Chart

3 Year Chart of the S&P 500 Index

What if S&P 500 Breaks Below 839? 60, 40 and 10 Year Chart View

Wednesday, November 12, 2008: The Stock Market as Represented by the S&P 500 Index went down 5.19% to close at 852.30.

Many people are concerned.

The most recent support area is 839.80 established on October 10, 2008. The S&P 500 could go down near this area and "test" support there.

The S&P 500 could successfully test and then bounce up.

Or, the S&P 500 could fail there, and go below 839.80.

Breaking below 839.80

If we break down below 839.80, the next major support was set on October 10, 2002, at 768.30. We could potentially reach there, and when we test, we could either bounce and form a very strong multi year double bottom (bullish), or we could break and fall much further down.



The Ten Year Chart Above shows the current S&P 500 value and the 6 year support of 768.30.

40 Year and 60 Year View



If we look at the longer term view, we notice that longer 40 year trend line from 1974 to 2008, shows that current support is around 800 on the S&P 500. The 40 Year Trend Line started around the major bottom of the great bear market of the early 1970s and continues today.

If we look at the 60 year chart since 1955, we notice a much lower support level of 400 on the S&P 500.

Watch the Tests

Let us observe how the stock market behaves at each major test point.

Today's Long Chart

Decade Chart

Possible Personal Finance Plan

The current times are very uncertain with talk of recession in the United States, and the stock market falling 40% since the peak late in 2007.

What can we do now?

Here is one possible suggestion. Of course, please consult your financial planner if you have one.

Create a Safety Net

1. Make sure you have at least a 6 month emergency cash reserve. You can find an FDIC insured high interest online savings account at SavingsAccount.com and find reputable companies such as HSBC.
   
2. Make sure you have enough health insurance and other types of insurance that you may need.
   

401k and Retirement Accounts

1. Continue putting money in your 401k or Retirement Accounts, especially if your company matches your contribution.
   
2. If you have many years/decades before you need your retirement money, then putting money in your 401k when the stock market is low is good, because that means you will be buying more shares with your money.
   
3. Do not trade in your 401k or IRA retirement account.
   
4. If you do not want to spend too much time managing your 401k, and if your plan offers a Target Date Mutual fund, which automatically adjusts risk based on when you plan to retire, research this fund. You can also check Morningstar and see if your Target Date Mutual Fund is a four or five star morningstar rated fund.
   
5. You should adjust your equity and bond portion of your portfolio based on your age and when you plan to retire. The closer you are to retirement, the less should be put in stock equity, and more in bonds.
   
6. If you do not want to use a Target Date Mutual Fund, you can allocate the different funds yourself. If you wish to have a 70% stocks, 30% bonds allocation, you could do:
   
   1. 30% Bond Fund
      
   2. 25% Large Cap US index
      
   3. 10% Mid Cap US Index
      
   4. 10% Small Cap US Index
      
   5. 25% International US Index
      
   
   
7. You can rebalance your portfolio once a year. Some 401k plans offer this as an option.
   
8. Do not put in too much money in your company stock in your 401k. That is too much risk. Put no more than 10% of your 401k in your own company stock.
   

Before Investing in a Discretionary Taxable Portfolio

1. Establish the Safety Net First
   
2. If you have high interest credit card debt, consider paying it off aggressively. If the online savings account returns 3% and you have credit card debt at 10%, then paying off your credit card at 10% is a risk-free return of 10%. If your credit card debt interest rate (and you are carrying a balance) is greater than the return you get in an online savings account, consider paying off the credit card first. If the return you get on an online savings account (let's say 3%) is greater than your credit card debt rate (example: 1.5%), you can pay off your credit card more conservatively, and keep the extra money in the FDIC insured online savings account.
   
3. Look around for high rate CD specials. Banks want to borrow money from consumers in this environment.
   
4. With the Fed Funds rate at extremely low levels, watch out for any low interest rate specials, especially those credit card life of balance offers. Beware of the transaction fees, and make sure that the interest rate does not increase after some time. Late fees could invalidate the special credit card offer. Also, make sure there is no balance on that credit card where you use the credit card special offer, because your payments will pay off the lower interest rate first before the high interest rate. This is bad for you, and good for the credit card company.
   
5. If you have multiple incomes in your household, it is best if the income producing individuals not work at the same company. What would be bad is if a company starts to downsize, and both members of the household are part of the same company. This is not good.
   
6. Decide how you are going to use the money in your discretionary taxable portfolio. If you need the money within five years, it might be best not to put the money in stocks/stock mutual funds.
   
7. If you do not own residential property (home, townhouse, condominium), consider preparing yourself for a purchase within the next five years. This down payment money should not be in the stock market (if you plan to use it within five years).
   
8. Check your credit score and make sure there are no mistakes in your credit report.
   
9. If you have done all of the above and need discretionary money six years or later from now, then you can consider starting a discretionary stock (and bonds) portfolio.
   
10. Do your research, research on the internet, buy or borrow some (up to date and reputable) financial books.
    
11. If investing for your child's education, do your research and consider some of the 529 plans around.
    

Managing your Discretionary Portfolio

1. Determine your asset allocation model. Do you want to have 80% stocks and 20% bonds?
   
2. If you do not want to spend too much time managing your portfolio, consider a portfolio of index mutual funds, or Exchange Traded Funds (ETFs).
   
3. If you have an interest and the time to invest in individual stocks, make sure you do your research.
   
4. You can do a combination of the above using the Index Mutual Fund method and then buy a few individual stocks, for the Core-And-Explore method.
   
5. Diversify your Portfolio.
   
6. Does your Portfolio have too much risk?
   
7. How many stocks should you own in the Portfolio?
   
8. For individual stocks (or very specific focused ETFs), make sure you know how to cut your losses.
   
9. If you want to put money in regular intervals, consider buying mutual funds, and automatically investing in more shares of the fund.
   
10. Continue Research including these financial websites.
    
11. Consider using the same plan you are using in your 401k and Retirement Accounts. Your Target Dates may differ: 401k/Retirement when you retire, your Discretionary Portfolio when you plan to withdraw all the money.