Wednesday, August 15, 2007

Lower Trading Range on S&P 500 after Today's Drop (August 15, 2007)

Today, Wednesday August 15, 2007, the S&P 500 ($SPX) dropped 1.39% to 1406.70. The $SPX dropped below previous good support of 1427, and that level is now resistance.

Where are the next more significant support levels on the $SPX?

In order to determine this, we have to take a 2 year view of the $SPX.

I put a Raff Regression Channel (orange uptrending three line channel) which shows the trend channel, and also the support and resistance levels. 1400 is a support level. The middle line also nicely marks resistance on the early August bounce.

I also put a Fibonacci Grid (five blue horizontal parallel lines) from the Late 2005 lows to the July 2007 highs. Fibonacci theory says that the numbers 38.2%, 50% and 61.8% show up in nature and in charts over and over again. If these lines coincide with other resistance levels (such as moving averages or horizontal resistance), the support levels and resistance levels defined by these lines are more valid.

In this case, $SPX has already gone below the 38.2% retracement (1410), and the next target zone is the 50% retracement of 1364. This 50% retracement level also coincides with horizontal resistance (previous low occurred around 1364 around March 2007), so we can have more confidence with this support level.

RSI, the Relative Strength Index, is still at 33 and has not gone down below 30. So we aren't extremely oversold according to that metric, though the Stocks under 200 Day Moving Average Metric ($SPXA50R), is a very low 34.20%. Numbers under 45% are usually signs that the end bottom could be near.

However, this is a fearful market, and I expect a new trading range between 1364 and 1427 on the $SPX.

Long Term Investor Suggestions

Over a very long time, stocks have outperformed bonds and inflation according to Professor Jeremy Siegel, author of Stocks for the Long Run. So it would be okay to be mostly invested in your discretionary portfolio.

However, rotate out of stocks that are not working, and rotate into stocks that are doing well and holding up well throughout this correction.

For those who want to Hedge without Put Options or Traders

If you want to hedge the portfolio without using Options, you can use Proshares ETFs. Proshares offers double short ETFs such as SDS. SDS is the Double Short S&P 500 ETF. If the S&P goes down 1x, SDS goes UP 2x. So as the market goes down, you profit using SDS. However, if the market goes up, you lose money with SDS.

In general, you would not want to hold SDS for a very long time. You can sell the SDS after it hits a target area, such as 1380 or 1365 on the $SPX.

For traders, once we get an idea where the intermediate bottom is, we can determine how to play a bounce. But we don't know exactly where the intermediate bottom is. Maybe 1365-1380 on the $SPX?

On, Roger Nusbaum writes about Hedging a Portfolio with Double Short ETFs.

Today's Chart with many of the the indicators above

No comments: