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

Time to Start Accumulating? Where's the Bottom after Today's Massive Drop

Today was not a good day in the stock market, as the S&P 500 went down -8.8% from 1213.27 to 1106.42 (-106.85). The market broke below the previous low of around 1133.

Where's the Bottom?

Based on Previous Chart analysis, there could be a good chance that the bottom of 1070-1077 could hold. If the market easily breaks through this level, the market would truly be in trouble.

But we believe that the 1070-1077 level could hold.

If the market does get there, we will not necessarily go straight up. The Bottoming process takes time. In fact, we believe we could have a very volatile, very violent trading range, and we could even have a bear market rally all the way up to 1270, 1330 or even 1387 before re-testing the low.



The average bear market decline is said to be around 30%, and we are currently around 30% below the recent high of 1576.

1077 is also the 61.8% retracement from the 2002 low of 768.63.

Should we get back in the market?

While the market needs time to recover, it is possible that we are near the bottom.

It is difficult to time the bottom, but there are some possibilities:

1. It might be time to start slowly accumulating some index funds. One can invest a little bit at a time over the next year or so. Over the long term (10 years), people could say that this could be a valuable buying opportunity. However, we may have to withstand the great volatility ahead.
   
2. Start looking over potential buys for the long term. While it is not wise to try to catch a falling knife, keep stocks on your watch list.
   
3. Make sure you are not taking too much risk in your discretionary portfolio.
   
4. It might be time to review your goals. What do you want to do with the money you are investing? And when do you need it by?
   
5. Remember to diversify.
   
6. What sectors would be good to own at this time? Cash rich companies? Consumer Staples? Determine your strategy.
   

Today's Chart

That Was a US Stock Market Capitulation Bottom. Next: Follow-through Rally then Re-Test of Lows.

What a crazy two days in the U.S. Stock Market!

On Sunday, January 20, 2008, the stock market was very oversold by many metrics, and we were due for a bounce. This blog mentioned on that day:

"All signs seem to indicate an S&P 500 Bounce may be coming soon (possibly after some sort of gap down, high volume down day, then a massive rally, for a capitulation bottom)." - TechFarm Blog

Monday, January 21, 2008 was a US Holiday. During this time, the worldwide stock market was selling off very heavily. Before the market started on Tuesday, January 22, the Dow Futures were down over 500. News reports from CNBC and other areas suggested that the Sky Was Falling.

For those anticipating a capitulation bottom, this was a good sign. There was a feeling that people would start to panic and sell at the lows. This is needed to help establish a capitulation, crescendo selloff bottom.

On Tuesday, January 22, the market gapped down (opened lower than the previous close), and the S&P 500 went down over 51 points (1325 down to 1274) for a decline of almost 4%. Then towards the end of the day, the S&P 500 recovered 36 points for a nice rally.

On Wednesday, January 23, Apple (AAPL) reported bad numbers, and the S&P 500 sold down very heavily, going down all the way to 1270 (re-testing the bottom on Tuesday). Then towards the end of the day, the stock market had a massive rally, going up 68 points for an over 5% swing on the S&P 500.

This looks like a classic capitulation bottom.

But does this mean we have an all clear?

This capitulation bottom might mean that we will have some sort of near term rally. We need some good follow-through.

In the previous post, we speculated that the S&P 500 might re-trace around 38.2% to 50% of the drop from the top. With the updated short to medium term bottom of 1270 on the S&P 500, we could re-trace and rally up to 1387 to 1423 or so before we go down and eventually re-test the lows.



Since V-bottoms are not the norm, we can expect a re-test of the lows at least once. During each re-test, the S&P 500 could pass (bounce off that support), or the S&P 500 could fail (continued breakdown to new lower support levels).

Do you feel Bearish?

If you feel bearish about the market, you can sell the upcoming rally, raise cash, rotate to defensive stocks. Once the market successfully re-tests, an investor could start thinking about going long on stocks again (profit from a stock when the stock price goes up.)

Today's Stock Chart

Is the Correction Over? Possible Bull and Bear Scenario on S&P 500 (August 17, 2007)

What a week we've had! The stock market goes up and down many percent each day. On Thursday, August 16, 2007, the S&P 500 Index ($SPX) opened down near the expected intermediate bottom area of 1365 ($SPX bottomed at 1370). There was panic in the market. But towards the end of the day, the market had a massive rally to finish almost even.

Thursday appeared to be a capitulation ("I surrender!") bottom and the nice recovery helped solidify that. Friday continued the Fibonacci bounce to the 1440 (38.2%) to 1463 (50%) levels.

Fibonacci Theory says that the 38.2%, 50%, and 61.8% numbers occur all throughout nature, and also in stock charts. You can place a Fibonacci Grid (the five blue horizontal lines in the chart above) with all those numbers from a high to a low or from a low to high. Resistance and Support levels often occur at these levels. If other support and resistance levels, such as the moving average or horizontal or trend line resistance occurs at those areas, then the Fibonacci lines are valid.

During a market drop, after the market hits some sort of bottom, the market often bounces to one of the fibonacci levels. It should bounce to at least the 38.2% level (1441) which was already passed on Friday, August 17. If the bounce is strong, the stock or index could bounce to the 50% level (1463) or even 61.8% level (1485). Then, the stock or index would reverse after that retracement.

In the $SPX chart, there is also congestion around the 1463 level.

So from today onwards, I expect a bounce to reach somewhere around the 1463 level. Then, I expect $SPX to reverse.

V shaped market bottoms are not very stable. What often happens is that sometime later (possible a week or so after the first bottom is made), the stock or index would re-test the lows. In the chart above, I expect $SPX to re-test near the previous lows of 1370. But the $SPX could go down to 1365 or so and then recover, and still be a successful re-test.

Now at this point, there is no edge in determining whether the $SPX will break down and start a new lower trading range, or it will bounce off the previous lows and form some sort of a Bullish double bottom.

If it breaks below the previous lows on good volume, we could see a new lower trader range, the bearish case.

However, if the $SPX bounces off the previous lows, this is bullish. We tested the previous lows twice and succeeded, forming a bullish double bottom.

At this point, we don't necessarily go straight up. The $SPX will mostly take time to consolidate, and eventually settle around 1441 to 1485 trading range. This would be consistent with the congestion that occured earlier at those levels.

After sufficient time, (maybe in the November/December timeframe), the $SPX would break out from this trading range and start challenging the previous all-time highs as part of the seasonal 4th quarter rally.


Today's Chart

Updates to $SPX resistance level for rally (Aug. 2, 2007)

The Wednesday, August 1, intraday reversal of $SPX after hitting a low of 1439 combined with very oversold conditions are some reasons why we might get a more sustained rally.

Based on Fibonacci retracements from the recent highs (1555) to the recent low of 1439, the rally might go up to either 38.2% retracement, 50% retracement, or 61.8% retracement which would be 1484, 1497, or 1511 if the rally is really powerful. 1497 seems like a reasonable resistance level in the $SPX.

As I mentioned earlier, I expect a re-test of the $SPX lows from around 1437-1440.

From there:
1. $SPX could bounce off support and form a good double bottom.
2. $SPX could break through support and start new leg down.

This is a partner piece to the previous chart analysis.

Today's Chart

Are we almost at bottom on S&P 500?

The S&P 500 Index (500 of America's most influential and largest companies) $SPX fell 2.33% to 1482.66. Are we near the bottom?

Based on the $SPXA200R and $SPXA50R indicators, we are nearing the bottom.

The $SPXA50R refers to the ratio of stocks in the S&P 500 that are above the 50 day moving average. We use this indicator as a contrarian indicator. When the $SPXA50R goes around the 20% area (meaning 20% of stocks in the S&P 500 are above the 50 day moving average), we are near or at the bottom. Right now, the $SPXA50R are almost at 20%.

The $SPXA200R refers to the ratio of stocks in the S&P 500 that are above the 200 day moving average. Again, we use this indicator as a contrarian indicator. When the $SPXA200R goes below 50, and around the 45% area, we are near or at the bottom. Right now, the $SPXA200R is slightly above 50%. A little bit more, and we should be at the bottom.

Check on Today's Status/Chart

To update yourself on the $SPXA50R and $SPXA200R, use this chart.

Current Support Levels

To help put the $SPXA50R and $SPXA200R indicators in perspective, take a look at the current support and resistance in the S&P 500.

Stock Chart: NYX (NYSE-Euronext) is in a downtrend? (June 19, 2007)

On June 6, 2007, this site analyzed the NYX (New York Stock Exchange-Euronext) Chart, and said that the NYX stock was in a holding pattern.

So how is it doing now?

Let us start with a 2.5 Year Chart:



Looking at this chart, we see that the NYX stock has been on a good 2.5 year uptrend. But if we draw a trend line (see note below on Trend Lines), we notice that the stock may have recently gone below the uptrend, though it has not done it with good volume.

Looking at the this time frame, we also notice that the Bollinger Band Width is under 10 (for this stock), a low value. Everytime the BB Width goes below Ten, we often have a move (either up or down). Some people would call this a volatility squeeze.

Now, the 10 month chart of NYX:



There is a lot of information on this chart, so let us examine each part.

The Negatives:

1. NYX stock has gone below horizontal resistance of around $79.31.
   
2. Once Support has been broken, Support becomes resistance.
   
3. Stock is below both the 50 day and 200 day moving average.
   
4. Based on the 2.5 year chart, the 2.5 year uptrend line may have been broken.
   
5. Stock's 50 day moving average has gone down below the 200 day moving average, also known as the Death Cross.
   
6. If you look to the left, you'll see the volume of stock activity by price. Around the $80-$88 range, we have a lot of congestion and lots of buying and selling. However, below that we see that buying and selling volume is much lower. Will buyers be supporting this stock at lower levels?
   
7. If the stock continues to drift down, the stock will have difficulty moving up again because of all the overhead supply. Look at all the volume at the $80-$88 level and above. Investors who have held the stock at higher levels want to desperately sell the stock as it gets closer to their cost basis, pushing the stock down.
   
8. Notice that from March 2007 to June 2007, we notice an inverse cup and handle, which is a bearish pattern.
   
9. Since December 2006, the stock has formed a series of Lower Highs and Lower Lows, or in other words, the stock is in a 7 month downtrend.
   

The Positives:

1. Stock has not gone down with good volume. However, stocks can still drift down without volume confirmation.
   
2. In the lower window, we have a MACD (Moving Average Convergence/Divergence) indicator. There's a possibility that we may have some positive divergence with the NYX stock and the MACD indicator. The NYX stock has recently been going down, but the MACD indicator seems to be suggesting higher lows, a positive divergence.
   

Conclusion:

So what do we make of the NYX Stock Chart? Many indicators would point to a breakdown in the stock. There are some positives we can look at but at this point, the negatives outweigh the positives.

From the sentiment perspective, there are many holders of the stock from $80 and above. Many investors may even be accumulating more shares at the $80 level. If the stock starts to trend downwards, there will be many investors who will be holding the stock at a loss. Their patience and conviction could be tested. If NYX continues to go downwards, many holders at higher levels will finally give up, and we will finally hit the bottom as former holders capitulate. This could then start a slow and arduous climb back up. But we are not at those levels yet.

Track NYX Stock Chart Now

2.5 Year Current Chart of NYX

Ten Month Current Chart of NYX


Note on Trend Lines:

Yes, give a chart to several chartists, and they may draw trend lines a bit differently. However, in the case above, the trend line looks correct, as the line is validated by seven different points along the line. The Trend line also nicely approximates the 200 day moving average.

Prediction Correct: S&P 500 bounces then re-tests lows.

Here is the Prediction of the S&P 500 Bounce and Re-Test of Lows on June 8, 2007:



Now here is the actual behavior of the market during this period:




The prediction looks to be correct. Right now, the market is re-testing the lows. It is finding support in the area between the previous lows and the 50 day moving average. We have to wait and see if the support area holds, or else we will get some variation of this ABC Correction Prediction.

Prediction: ABC Correction on S&P 500 (6/7/07)

Prediction: Current S&P 500 Market will Correct and undergo an ABC Correction. Current resistance is the 50 day moving average at 1487. But based on market behavior, this resistance might not hold. There is a lot of buying volume between 1430 and 1460, and those who bought during that time might get worried and start taking profits now or on any rally.

The 50 day moving average should get taken out, and maybe hesitate at the 38.2% retracement price of 1477. However, better support will probably be at around 1457-1460 since previous buyers used to be at that level. This is the A-wave.

Buyers at the 1460 bring the price up back to the 38.2% retracement price of 1477, the B wave.

Then we finally get the C wave, and go down all the way to the 61.8% retracement level at 1437-1440. Sellers will be exhausted, and there is previous buying interest at these levels and we near the bottom.

In addition, I'll be watching another indicator, the $SPXA50R, the percent of S&P 500 stocks that are ABOVE (chart annotation says below. The chart annotation is wrong) the 50 day moving average. Previous history has shown that when this amount goes below around 30%, we are near the bottom. We are not there yet.

I used the tools at StockCharts.com

The idea of using $SPXA50R is thanks to Matthew Frailey at www.breakpointtrades.com .