Where's S&P 500 Support after Today's Big Drop? What should we do?

New Trading Range

Today, the stock market as represented by the Dow Jones Industrial Average dropped over 500 points for a loss of 4.41%. The S&P 500 dropped 59 points to 1192 for a 4.71% loss.

This drop was not unexpected. Around July of 2008, the S&P 500 hit a new low of 1200. Often, these lows are re-tested, and this is what we had today. We re-tested the lows and broke below previous support level.

We expect the S&P 500 to find a lower trading range.

Based on previous analysis, there's a good chance that the S&P 500 bottom could be between 1077, to 1172, a potential 10% drop from here.

Re-Evaluate Portfolio and Goals

So what should we do now? Over the long term, the stock market is the best place to be. However, this involves risk.

Have you looked at your goals and your portfolio and re-evaluated where you are? Do you need the money within the next five years? Do you have many decades to weather the storm? Do you have credit card debt? Do you have too much risk in your Discretionary Portfolio (as opposed to your retirement portfolio)?

Possible Ideas

So your main focus should be to re-evaluate your portfolio and your goals and your current financial situation. This should be the basis of many of your actions.

Depending on your high level game plan, here are a few tools:

1. Readjust allocation: Maybe you might want to have more cash or bonds, and less exposure to equity.
   
2. Stock or Sector Rotation: Maybe you might want to rotate away from sectors which are bad and rotate to the safer consumer staple names such as Procter and Gamble (PG).
   
3. More Diversification: Maybe you are too concentrated in your portfolio? Maybe you should readjust your portfolio to have better diversification.
   
4. Move towards ETFs, and Index Funds: Are you sure you can still keep up with your stock portfolio? Maybe you should consider just investing in broad based index funds, or ETFs. Or, you could do a combination of both for the Core and Explore method.
   

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.

Was that a Double Bottom on the S&P 500 or is this an Opportunity to Short?

Today, the US Stock Market had one of the best rallies in years. The Dow went up over 416 points for a 3.55% gain. The S&P 500 bounced off the previous lows of around 1272 to make a 3.71% gain to 1320.65.

Is this the double bottom we have been waiting for? This blog expected a re-test of the lows of 1270 on the S&P 500. We recently tested the bottom and successfully bounced. But does this mean that we have a solid bottom?

Not necessarily.

The intermediate trend is still down. This may be just an oversold rally with massive short covering.

If our stock market breakdown scenario holds, we could be forming some sort of handle, in preparation for the next leg down.



In the chart above, we still see the S&P 500 in a downtrend. The S&P 500 is still underneath both the 200 and 50 day moving average.

Two resistance areas are the 50 day moving average, and the 50% retracement (from the 1396 to 1270 drop) line of around 1330. This 50% retracement also happens to hit other previous levels of support and resistance.

If we draw a triangle estimating the 50 day moving average trend and the 50% retracement line, we can see a future potential area to start a new short position.

But we can afford to wait and see how this market reacts before finding a good place to short.

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

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

Today's Chart with many of the the indicators above

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

Stock Chart: NYX (NYSE-Euronext) Next Support Levels (June 21, 2007)

This site has been discussing the NYX stock (New York Stock Exchange-Euronext). Previous posts here (June 19, 2007) and here (June 6, 2007).

Now the chart above looks at the next support areas. I've determined the resistance based on previous horizontal resistance and my version of Fibonacci Estimates. I have confidence in the Fibonacci Grid I created above because the Fibonacci lines also coincides with other resistance areas.

So the next levels of support (Approximates) are $76, $72, and $70.

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 .

Current S&P 500 Correction (June 7, 2007)

The US Stock Market seems to be in correction mode. The S&P 500 Index, through the $SPX index, appears to be just above the 50 day moving average. The way the index has behaved, I wouldn't be surprised if the stocks go below the 50 day moving average.

Some support zones:
1487: 50 day moving average.
1476: 38.2% Retracement (using Fibonacci Grid)
1457: 50% Retracement (using Fibonacci Grid)

I would not be surprised if the "correction" tests some of these levels and bounce at least once off one of these resistance levels.

(I used the tools at StockCharts.com )

FCX, Freeport McMoran initial resistance

Freeport McMoran (FCX) is breaking out. When a stock is breaking out (with no prior history at that level) it's not obvious finding a resistance level. I am using a Fibonacci Estimation Method to determine initial resistance.

Based on this, looks like FCX might have initial resistance (and go sideways) at $83.