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

Crude Oil and Natural Gas Chart, Support and Trendlines

The Chart above shows Crude oil support levels at $100 a barrel and $87.71 a barrel. The 50% and 61.8% retracement from the three year lows matches horizontal resistance, which is good validation.

The bottom chart shows the ratio of Crude Oil to Natural Gas. We see the trend line of this ratio. If the ratio of Crude Oil to Natural goes back to trendline (around 12:1), then that means either Crude Oil continues to drop or Natural Gas increases or a combination of both.

Today's Chart

Expected Stock Market S&P 500 Bottom using Long Term (8 year) View and 50% Retracements

Many people are saying that the Stock Market (as represented by the S&P 500 index) is in Bear Market territory, being down over 20% from it's recent high of 1576 (today, the S&P 500 is at 1261. The annotated chart above is from March 2008, but it still shows important levels).

Where's the bottom?

In technical analysis (analyzing the stock charts), there's a school of thinking that uses Fibonacci Retracements. In nature and in the stock market, the ratios of 61.8%, 50% and 38.2% are important levels. If we take any uptrend or downtrend in the stock market, if we look at the retracement levels (the levels at 61.8%, 50% and 38.2%), these levels often coincide with resistance and support levels.

On March 24, 2000, the S&P 500 hit an intraday high of 1552.87. During that last bear market, the S&P 500 then lost almost 50% of it's value to an intraday low of 768.63 on October 10, 2002.

The most recent high today was set around with an intraday high of 1576 on October 11, 2007.

Over the last several months, the S&P 500 bounced nicely around the 1270 level, which coincides with the 38.2% retracement from the lows of 2002.

Now, it would appear that the S&P 500 could go lower. The 50% retracement from the 2002 S&P 500 lows would be 1172, and 1077 would be the 61.8% retracement.

Looking at the chart above, we also notice a lot of congestion from 2003 to 2006, in the range between 1077 to 1267. This is a good sign that we could find stronger support in this region.

Maybe 1077 could be a good lower target on the S&P 500.

In addition, many sources claim that the average bear market decline is 30%. If this is so, then a 30% decline from 1576 would give us an S&P index value of 1104, very close to the 1077 S&P 500 61.8% Fibonacci Retracement.

The S&P 500 longer term bottom looks to be around 1077 to 1172 based on the scenario above.

Of course, we can monitor the situation of the S&P 500 at each support and resistance level.

Today's S&P 500 Chart, Long Term View

Today's Three Year S&P 500 Chart

Original Article which used the Annotated Chart Above

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

We will have a Volatile Meandering Trading Range Stock Market in 2008

Are you experiencing a wild roller coaster ride in the US Stock Market in 2008? It is not over yet.

Near the end of June 2008, the S&P 500 ($SPX) formed an intermediate bottom of around 1270. As expected (this blog wrote about the re-tracement), the S&P 500 had a 38.2% to 50% Fibonacci retracement rally to around 1400. The re-test of 1270 is currently expected.

At that point, the S&P 500 could pass or fail. If it fails, we could establish new 52 week lows and go down to 1220. Or, the S&P 500 could pass and bounce off support of 1270. Potentially, during a bottoming process, the S&P 500 could re-test 1270 several times.

Depending on how things go, the S&P 500 could break resistance at about 1400 to 1424 and form a new higher trading range.

Whether up or down, the market in 2008 is expected to be a meandering, trading range bound market, with a possibility of even more breakdowns below 1270 on the S&P 500.

Today's 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

S&P 500 Chart Update after Big Drop Today (August 3, 2007)

On August 2, 2007, I said that the S&P 500 Index ($SPX) would bounce to at least 1484, a 38.2% retracement from the all time highs of 1556 on July 2007, to the recent bottom of 1440 late July 2007. However, the $SPX couldn't even bounce to the 38.2% retracement level. This is a sign of a very weak market.

I also said that after the bounce, the $SPX would re-test lows from 1437-1440, and we have to see how the $SPX behaves, whether it forms a double bottom, or break through support.

Today, August 3, 2007, the $SPX went down 2.66% to end at 1433.06. We have our answer: the $SPX fails the re-test of the lows. And support (1437-1440) is now overhead resistance.

Breaking the 1437 level is also not positive, since 1437 is a 61.8% retracement from the March 2007 lows of 1364 to the recent highs of 1556. I would have liked to see the 1437 line hold, but it didn't.

Next support areas are horizontal support at 1410, 1372 and 1362.

The $SPX is currently very oversold, with only 16.40% S&P 500 stocks above the 50 day moving average. Typically, numbers under 20% signals that we are near or at the bottom. Of course, oversold markets can remain irrational and continue to be more oversold. Next support level is 1410.

There are wild cards in the market. The Fed could cut rates, and impact the $SPX positively.

Also, there are sectors which are working better than others.

Perspective from 2 Year View


If we look at the 2 Year view, we can get a better perspective. We can set up a Fibonacci grid from the October 2005 lows to the July 2007 highs (Fibonacci means that certain numbers, such as 38.2%, 61.8%, and 50% occur very often in nature. And this can be applied to stock charts as well. This can aid in determining resistance and support levels). If we look at the 38.2% retracement, we find 1411, which coincides almost exactly to the 1410 level mentioned above when looking at the 6 month chart above. When we look at the 50% retracement, we find 1365, which coincides almost exactly to the 1362 level above when looking at the 6 month chart above. This is a good sign that the support resistance levels mentioned in the 6 month and 2 year charts are valid. (Valid means they are valid, but it doesn't mean that the support levels will always hold. Support levels can be breached, or stocks or indices could bounce at support levels).



Today's 6 month Chart of $SPX

Today's 2 year Chart of $SPX

S&P 500 Possible Scenario (July 27, 2007)

As of Friday, July 27, the market and the S&P 500 have been undergoing a correction. The S&P 500 is now at 1458 and many technical indicators are flashing very oversold conditions:

1. Only 18% of S&P 500 stocks are above their 50 day moving average.


2. Only 47.8% of S&P 500 stocks are above their 200 day moving average.


3. The 10 day Moving Average of the Put-Call Ratio is at 1.12 (above 1.0)


4. The ratio of new highs to new lows on the S&P 500 is only 7.4%

The closest support level is the 200 day moving average at 1448, then horizontal resistance of 1440. The 200 day moving average would be a reasonable bottom target (since we are in very oversold conditions), and this target could be reached intraday. The $SPX should have a bounce (using Fibonacci Retracements) to the 38.2% or 50% retracement which would be somewhere between 1489 and 1501 on the $SPX.

Usually, V shaped bottoms don't last. I expect the $SPX to re-test the previous lows (expected to be at the 200 day MA of 1448).

During the re-test, we can then determine whether the $SPX will continue another leg down (for the next leg in a larger ABC Correction), or, the $SPX may form a double bottom.

We can then come up with a new scenario at that point.

For Today's Chart with Info Above

Trading Advice if Above Scenario is True:

If the above scenario works out, a trader could:

1. Cover all shorts now.


2. Get ready to go long on the S&P 500. This could occur very quickly and occur intraday.


3. Be prepared to play the bounce to 1489 to 1501 then sell the long position, and go short on the S&P 500.


4. Cover the short once the $SPX re-tests the previous lows.

If one is more of an investor with a longer time frame (multiple years):

1. Cover all shorts now.


2. Create a wish list of stocks to go long, and get ready to buy in the very near future (even on Monday!)


3. Start a 25% position on selected stocks.


4. After the bounce, look for the re-test. If the $SPX re-test is successful, you can add another 25-50% position on your favored stocks. But watch out if there is another leg down! The $SPX could fail on the re-test.

Jim Cramer's thoughts on Bottom

Jim Cramer in this article, talks about the bottom. One of his indicators is a proprietary S&P 500 indicator that is at -6.5, an extreme reading which has only occurred twice in seven years. He says that the bottom usually occurs within 48 hours.

But even if we do get a bounce, beware of the re-test back to the previous lows. We'll determine what to do after the re-test of the lows.

Otherwise, watch out below. Next support levels on $SPX are 1420, 1410, 1380.

WARNING: You can lose money in the stock market. Please do your due diligence.