How far can this (Bear Market) S&P 500 Stock Market Rally Go?

On March 10, 2009, the S&P 500 went up 6.37%. Some pundits are calling for a bottom, but many see this as merely a Bear Market Rally.

How far can this rally go?



First major candidate is S&P 500 level of 740 to 760. This was the previous low held late in 2008, and is also the level that held in the Bear Market Bottom of 2000-2002.

Another candidate is the breakout point off a symmetrical triangle pattern.

Previously, this blog demonstrated that the S&P 500 recently broke down from a symmetrical triangle.

According to stockcharts.com:

Prices sometimes return to the breakout point of apex on a reaction move before resuming in the direction of the breakout. This return can offer a second chance to participate with a better reward to risk ratio. Potential reward price targets found by measurement and parallel trend line extension are only meant to act as rough guidelines. Technical analysis is dynamic and ongoing assessment is required.

It is possible that the rally could continue to this breakout (breakdown) point of around 825 on the S&P 500.

The 50 day moving average is very close to the 825 breakdown point on the S&P 500.

Overextended from the 200 Day Moving Average

The S&P 500 is also very overextended underneath the 200 Day Moving Average. This suggests that the rally could have some room, or go sideways long enough for the 200 Day Moving Average to catch up.

Today's Stock Chart of the S&P 500

Will S&P 500 Stock Market Rally or Continue Downtrend? Market is at Resistance.

The Market (as represented by the S&P 500) is at a decision point. Does the S&P 500 rally or continue the downtrend?




Currently, on Friday, Dec. 5, 2008, the S&P 500 is at 876, and is very near many resistance levels.

1. Horizontal Resistance: Around 900 to 916
   
2. 3 Month Downtrend Resistance: Around 879
   
3. 50 Day Moving Average Resistance: 936
   

If Stock Market breaks through these resistance areas with good volume, there's a good chance the rally continues to at least 1000 to 1040 on S&P 500.

Otherwise, the S&P 500 could continue its downtrend.

We can also pay attention to any big gap up at the open, followed by a high volume reversal to the downside to end the day down. This could mark a failed attempt to breach resistance.

Today's S&P 500 Chart

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

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

US Stock Market and S&P 500 near short term resistance

This blog previously posted a breakdown scenario, and pointed out potential resistance areas.

Right now, the S&P 500 has support at 1270, and resistance at around the 1330-1340 level (based on 50% retracement, as well as other resistance levels). The market, currently at 1329 on the S&P 500, is also very near the 50 day moving average, which is currently at 1345.

If the S&P 500 tests resistance and fails, we could potentially re-test 1270 on the downside, and possibly breakdown some more, as we speculated.

However, if the market can sustain some strong days and have good follow through, breaking through the 1330-1340 levels, and break through the 50 day moving average, we have a chance for a good rally.

But the trend would still be down (based on the S&P 500 remaining below the 200 day moving average) and I don't think there is enough strength to break above the 200 day moving average right now.

Here are two Previous Charts on Resistance Levels (2 weeks ago):





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