Sunday, March 16, 2008

Are you a Bull or a Bear? Is this Stock Market Broken? Where's the Bottom?

The Battle Between the Bulls (those who think the stock market will go up) and the Bears (those who think the stock market will go down) continues.

Are you a Bull or a Bear?

The Bulls

On March 11, 2008, Investors Intelligence released their latest Bull Bear Ratio.

As of that date, there are 31.1% Bulls and 43.3% Bears. The Bull Percentage is very low (and even less than the Bear percentage) which suggests that we may have some sort of bottom. Many other metrics show that the stock market may be oversold.

In addition, the market as represented by the S&P 500 recently successfully re-tested the 1270 lows and may be poised for a double bottom reversal, if we breakout from current resistance.

Dean Reese, on the Trading Goddess Blog, makes an argument that the market is not broken based on rare relative strength levels (RSI) and the 38.2% Fibonacci Retracement off a five year trend.

The Bears

However, looking at the chart from many angles, the intermediate trend looks down.

The S&P 500 is still below both the 50 and 200 day moving averages.

While we appear to have a double bottom based on the bottoms on January 2008 and March 2008 at the 1270 level, we do not have a double bottom reversal just yet. We need to see strength first.

The S&P 500 also appears to be forming a possible inverted cup and handle bearish formation.

In addition, the three year (or more) uptrend appears to be over.

Looking from a non-technical perspective, there were nine recessions from 1950 to 2007, and the average length of the decline was around 10.3 months. If we use this average, and use the start of the decline as October 2007, then we estimate that the downturn will end around August 2008.

How deep will the S&P 500 fall?

Dean Reese in the same blog entry on the Trading Goddess Blog, claims we can have a tradable bounce based on the 38.2% Fibonacci Retracement Holding (S&P 500 is very near the 38.2% Fibonacci Retracement Levels based on a 5 year trend).

While 38.2% is a potential support area, the market could find support even lower.

I added more annotations and comments to Dean Reese's chart:

If we consider the 50% and 61.8% Fibonacci Retracements, they both coincide with other areas of support and appear to be valid areas of support.

In addition, if we look at the period from November 2003 to August 2006, we notice a lot of congestion (the box on the diagram). This suggest much stronger support in this area.

Investors and traders who started going long towards the end of 2006, did not have much time to get on board, and most likely have been shaken out. Those who were in the market from the end of 2003 to the end of 2006 are starting to get nervous.

But because of the congestion from November 2003 to August 2006, we can speculate that we can find a stronger bottom here, from around the 1070 level to the 1267 level. This happens to coincide with the 61.8% (1077) to 50% (1172) to 38.2% (1267) Fibonacci retracement area.

So yes, it is possible that we still have up to 17% downside on the S&P 500 (if 1070 is the estimated bottom).

Silver Lining?

But as with all recessions and bear markets, this too will end, and we could have a great investing opportunity sometime this year or next year.

Interesting Symmetry

I flipped over the annotated chart above. Compare the chart above and the chart below. Notice the amazing symmetry? And you know what happened from 2000-2002.

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