Profit from Current Bear Market with Inverse ETFs

We have recently broke down below the major support level of 741/768 on the S&P 500 which were held recently and during the great bear market bottom of 2002.

This blog has set a target of 450 to 600 on the S&P 500 based on many factors.

Excellent Chartist Louise Yamada, who has been right so far, agrees with this assessment.

If you do believe that the market could go down from here (700 level) to 600 (drop of 15%) to 450 (drop of 36%), what can the investor do?

Conservative Method: Cash

The most conservative method is to increase the cash position in the portfolio. The next decision point would be when to start reallocating money in stocks again.

More Aggressive: Profit using Inverse ETFs

The more aggressive option is to purchase Inverse ETFs, or Inverse Exchange Traded Funds.

Exchange Traded Funds, such as the ticker symbol "SPY", are similar to indexed mutual funds, but they can be traded, and bought and sold just like stocks. You would normally pay a commission.

SPY, for example, represents the S&P 500 index. If the S&P 500 goes up 2x, the SPY would attempt to track that performance and go up 2x.

Inverse ETFs, on the other hand, are very similar, but they perform the opposite of the index.

For example, the inverse ETF "SH" is the Short S&P 500 ETF. When the S&P 500 goes up 2x, the SH goes down 2x. If the S&P 500 goes down 3x, the SH goes up 3x.

Another example is the double inverse ETF "SDS". This is the Ultra Short S&P 500 ETF. If the S&P 500 goes up 1x, SDS goes down 2x. If the S&P 500 goes down 1x, SDS goes up 2x.

These ultra and short ETFs are not meant to be investments, but trading vehicles.

Other Inverse ETFs from Proshares

Proshares is the company that provides many of the popular inverse ETFs.

Other examples include:

1. DOG: Short Dow30
   
2. MZZ: UltraShort MidCap 400
   
3. SKF: UltraShort Financials
   
4. SMN: UltraShort Basic Materials
   
5. SRS: UltraShort Real Estate
   

Some of the UltraShort ETFs are very volatile and do handle them with care.

Trading Strategies

Using inverse ETFs is not meant to be an investment, but a trade. You should come up with a plan when to buy, when to sell, and know how to cut your losses.

You can use techniques as using limit orders (specifying the largest price you'll be willing to buy an ETF, for example), setting stop orders (in case you are wrong, you get to cut your losses quick), or even set trailing stops (as you profit, the stop order to sell follows your stock).

The strategies to trade these inverse ETFs are beyond the scope of this particular blog entry.

Stock Chart of SPY (S&P 500 ETF, Long)

Stock Chart of SH (Inverse or Short S&P 500)

Stock Chart of SDS (UltraShort S&P 500)

Stock Chart of SKF (UltraShort Financial)

Stock Chart of SRS (UltraShort Real Estate)

Stock Chart of QID (UltraShort Nasdaq 100)

Stock Chart of SMN (UltraShort Basic Materials)

Stock Chart of SIJ (UltraShort Industrials

Stock Chart of DUG (UltraShort Oil and Gas)

Stock Chart of REW (UltraShort Technology)

Stock Chart of EUM (Short MSCI Emerging Markets)

Stock Chart of EFZ (Short MSCI EAFE, International)

Stock Market S&P 500 to Continue Large Drop If We Break Important Levels.

S&P 500 Level of 741 is a very important technical support level. It is the major bottom in late 2008. It is also very close to the major bottom of the great bear market which ended in 2002.



In the chart above, we notice the importance of the S&P 500 level of 740 to 760. We also notice that in 1995, the slope of the chart increases at an unsupportable rate. It was during this time, that the mantra "buy the dip" was used with great success.

However, starting in 2000, the Bubble burst going down to S&P 500 level of 768.

From 2002 to 2008, we had another Bubble (credit, housing bubble), and it burst again, and went all the way down to S&P 741.

This major support area of S&P 740 to 760 has to hold. If it doesn't, then there is not much support all the way down to S&P 500 level of around 500 (1995 levels). There is not much congestion between the the S&P 500 level of 500 to 740, and support will be hard to find.

This bottom of S&P 500 level of 500 is consistent with this blog's target of S&P 500 level of 450 to 600.

On Friday, February 27, the S&P 500 closed at 735, below the important level of 740 to 760. This may be a sign that we are continuing to head to the lower S&P 500 target. If the target is S&P 500 level of 500, that is another drop of around 47%.

60 Year View



Notice that in the 60 year view, the trend line shows a support level starting at around 400, and as time passes, the support level would increase. This is close to the lower S&P 500 target of 450 to 600.

So from 1995 to 2000, we had the "Buy the Dip" Mantra. Now, as we go back in time to 1995 S&P 500 levels, we will have the "Sell the Rally" strategy which should work in this market.

Today's Stock Chart

Stock Market (S&P 500) Breakdown to New Levels Has Begun

For the last three to four months, the Stock Market, as represented by the S&P 500 has been trading in a symmetrical triangle pattern. This blog has been saying that breakout would occur soon, sometime during February.

On Tuesday, February 17, 2009, the S&P 500 has finally broken down from the symmetrical triangle and is starting a new downtrend.



There is major resistance at around the 740 to 760 level from the November 2008 lows of 741, and the major low of 768 during the last Bear Market from 2000 - 2002.



While the stock market could bounce off these lows again, based on the breakout from the symmetrical triangle pattern, we could hit a low of 558 on the S&P 500. [Since the maximum range of the previous triangle is 267 (1007 - 740 = 267), we apply this to the breakout point of 825 to come up with a downside target of 558 (825 - 267 = 558)]

This matches this blog's analysis of a S&P 500 bottom of 450 to 600.

Notice that if we break down below the major S&P 500 bottom of 740 to 768 on the S&P 500 set in 2002 and 2008, there is not much support below:



We do appear to be in the middle of a long term secular bear market that started in 2000 and will end around 2016.

Today's Chart of S&P 500

Stocks (S&P 500) Converging and is Breakout Near? Usually a Continuation Pattern (More Downside Ahead?)

U.S. Stocks, as represented by the S&P 500, are converging towards a certain price, forming a wedge or symmetrical triangle pattern.



Chartists and technicians often say that near the end of the triangle or wedge, a breakout could occur with good volume. While the breakout could occur in either direction (up or down), the pattern is often a continuation pattern of the previous trend:

"While there are instances when symmetrical triangles mark important trend reversals, they more often mark a continuation of the current trend. Regardless of the nature of the pattern, continuation or reversal, the direction of the next major move can only be determined after a valid breakout." (stockcharts.com)

Since the previous pattern had been down, this means that the continuation pattern would mean further downside.

Following stockcharts.com recommendation of estimating the strength of the move, we can take the widest part of the symmetrical triangle (approximately from $SPX level 1010 to 740 or so, for a depth of 270 S&P 500 points), and then apply this at the breakout level.

If the breakout occurs near 870, that means that the move could extend down 870 - 270 for a target of S&P 500 600. This lower target of S&P 500 value of 600 matches previous lower target analysis of a bottom of 450 to 600.

But as many sites warn, while the wedge or symmetrical triangle pattern is usually a continuation pattern, it could also be a reversal pattern, so let us observe the breakout and the validity of the move according to stockcharts.com.



Today's Stock Chart

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

Stock Market S&P 500 Long Term Bottom Target: 450 to 600, a Drop of 25% to 44% from Here

Previously, we offered analysis that the US Stock Market could be in trouble if the S&P 500 goes below 768.

The S&P 500 recently went to an intraday level of 741 but successfully tested the major low of 768 set 6 years ago on October 10, 2002.

It is still very possible that the S&P 500 could re-test (at least once) 741/768, and the S&P 500 could break below this level.

At this point, where would a potential long term bottom be?

In the Dire Consequences if S&P 500 goes below 768 post, we hinted that a long term bottom might be reached around the S&P 500 level of around 500.

The Long Term bottom could be around 450 to 600 on the S&P 500 over the next several years, a drop of around 25% to 44% from here (S&P 500 Level of 800).


A. No Major Support Until Around S&P 500 level of 450 to 500.



From the chart, aside from seeing the major support area of 768, we also notice that from 1995, the slope of the Chart increases to an unsupportable level, ending up in the Bubble of 2000. The Stock Market had no time to rest from 1995 to 2000, and there was no time to consolidate. This lack of stock market consolidation does not provide any good support for the market as it falls below the 768 level on the S&P 500. This could potentially mean a large drop (over years?) if the S&P 500 drops below 768.

The S&P 500 Level in late 1994 right before the S&P 500 rocketed upwards at an unsustainable rate is around 450.

This sets up the lower end of the long term bottom range of 450 to 500 on the S&P 500.

B. Reverting Back to 60 Year Trend Line Suggests Level around 400-500



Looking at the 60 Year Chart of the S&P 500, we notice the 60 Year Trend Line hits the S&P 500 level of around 400 at this time. If we look forward over time, this trend line would approach 450 to 500, which coincides with the predicted long term support level above.

C. Five Month Fibonacci Grid Suggests Bottom of 600



When we look at the five month chart, we place a Fibonacci Grid and align the top to a recent high (of around 1265), and align the 61.8% and 38.2% line to coincide with the recent trading range between 850 and 1010. The lower range of the Fibonacci Grid suggests a potential bottom.

This S&P 500 level is 600, setting the upper range of a longer term S&P 500 Bottom.

D. 60 Year Fibonacci Retracement: 50% = 770; 38.2% = 588

Early in 1950, the S&P 500 was around 17. At the top of the market, the S&P 500 reached around 1560.

If we use the Fibonacci Retracement Rule of 50%, that would lead to the S&P 500 Retracement of 770, which coincides with the recent major bottom of 768 that was achieved October 10, 2002, and very recently.

If we use the Fibonacci Retracement Rule of 38.2%, that would lead to the S&P 500 Retracement of 588, which is within the 450-600 range using previous methods of analysis.

E. Chartist Louise Yamada Opinion: 400 to 600

On a recent CNBC Fast Money episode, Chartists Louise Yamada predicted an S&P 500 bottom of 400 to 600. This coincides with the analysis so far.

F. Secular Bear Market, Cyclical Bull Market

Television Personal Financial Advisor Suze Orman predicted in 2004 that in 2000, we started a Secular Bear Market (long term Bear Market of around fifteen years), and around 2003, we started a cyclical Bull market (short term market lasting around two to four years), that would eventually end, and hit near the lows of 2002.

Her prediction was accurate.

If her prediction continues, we will continue the Bear Market until around the year 2015 or so.

G. Major Demographic Shift Ahead

In 2010, there will be a major demographic shift as the first Baby Boomers reach 65 years of age, and may retire and take more money out of the stock market. More Baby Boomers will do the same in the years following 2010.

This may put pressure on the U.S. stock market and may be in line with the long term Secular Bear Market theory starting in 2000 and ending around 2015.

Five Month S&P 500 Stock Chart

Sixteen Year S&P 500 Chart

Stock Trading Ideas after Stock Market Drop Today

The S&P 500 went down 52.54 points today, to close at 806.58, a drop of 6.12%.

The S&P 500 broke below previous support of around 839 and 818.

We previously wrote what could happen if the S&P 500 breaks below 839, or even if the S&P 500 breaks 768.

This can be a very scary market, but for traders, this can be a great market. Traders like volatility. For many years, the US Stock Market had been trading at below average volatility, and it was just a matter of time before the stock market reversed itself and entered a high volatility phase. We are currently experiencing this high volatility.

Using SPY as Trading Vehicle

One trading vehicle is to go long (profit when stock goes up in price) or short (profit when stock goes down in price) the SPY, the S&P 500 ETF

The SPY attempts to mimic the S&P 500 index, but it is not a perfect match. In general, the SPY is currently at $81.50, and the S&P 500 ($SPX) is at 806.58, an approximate ratio of 1 to 10.

Using Inverse ETFs to Trade

Alternatively, you can use the inverse ETFs at Proshares.com.

Some of the products include:

1. SH: ETF that goes up 1x if the S&P 500 goes down 1x, and ETF that goes down 1x if the S&P 500 goes up 1x.
   
2. SDS: ETF that goes up 2x if the S&P 500 goes down 2x, and ETF that goes down 2x if the S&P 500 goes up 2x.
   

So rather than shorting the SPY, you can go long on the SH. Of course, the behavior and value of SH differ from SPY.

Trading Ideas After Stock Market Drop Today



The S&P 500 broke below previous support of 839 and 818 (on an intraday basis), and it appears as if we are in a breakdown and the SPY is trying to find a trading range.

We expect the upper band of the trading range to be previous support at around 839. It is known that what was once support now becomes resistance.

On the downside, it appears that 768 appears to be the next major bottom. This 768 bottom was reached October 10, 2002, 6 years ago, in a major bottom after the 2000-2002 Bear Market.

So if the S&P 500 ever reaches 768, we do not expect it to break through 768 right away. It should respect the 768 major support at least once.

So how can we formulate a possible trading plan?

A) First Trading Idea: Short SPY here

This plan refers to trade A) in the chart above.

We know upper resistance on SPY is around $83.50. And since the SPY recently broke down below this (ideally, with high volume), the short term trend appears to be down. In fact, it is possible that the SPY can shortly re-test resistance at $83.50 before continuing down.

The first trading idea is to short the SPY (or go long on the SH), around these levels.

Where is a possible bottom?

As we discussed earlier, $76.80 is a good target on the downside, and a single re-test of the October 10, 2002 lows should be in order. This is a major bottom.



We can cover the short near this area.

B) Second Trading Idea: Go Long SPY at $76.80

Since we expect at least a single re-test of the $76.80 levels, we can cover our previous short, and then go long SPY.

Where can we cover? We do not know how far the rally can last, but the resistance area of $81.80 to $83.90 area would be good bets.

C) Third Trading Idea: Short SPY after rally to $82

Once the rally runs out of steam, we can sell our previous SPY long position, and go short for the estimated re-test of the SPY low of $76.80.

We do not know whether the re-test at $76.80 will succeed or not, so it is best to cover the short around this area.

D) Fourth Trading Idea: If SPY breaks $76.80 to the downside, Short SPY!

If the SPY finally breaks the major support of $76.80 to the downside, it is time to short SPY because this would be a very bad scenario for the market, but an opportunity for you to profit.

Use Limit Orders, Stop Orders and Trailing Stops

This is a very fast moving market. If you cannot monitor the stocks every moment of the day, you can use limit orders, stop orders and trailing stops.

Today SPY is at $81.50. Let's say during this time, you put in a Limit Order to Buy at $76.80 (good for 60 days).

SPY starts going down (your order has not been executed at this time) but has not reached $76.80. Then several days from now, SPY reaches $76.80.

After purchasing SPY at $76.80, you then put in a Stop Order to Sell at $75. You expect SPY to bounce at $76.80 and go higher. If this happens, this is good, and you eventually take your profit.

But there are times when you are wrong. SPY could continue falling below $76.80 and when it hits $75, your SPY order to Sell will be active.

Is it possible that SPY reaches $75, hit your stop order to sell, then start climbing upwards again? Yes, this can happen. But it is good to remain disciplined, and stick to the rules.

You can also use Trailing Stops as a technique to limit losses, and to protect profits.

Let us Monitor the Situation

Of course, we should monitor the situation at each stage, and we should remain disciplined.

Today's SPY Chart

Today's S&P 500 Chart ($SPX)

Dire Consequences if Stock Market S&P 500 Breaks Below 768.

Monday, November 17, 2008: The S&P 500 is at 850.

The Stock Market as represented by the S&P 500 has been holding the support level of 839 successfully.

Looking forward, what if we break below 839?



The next major support is at 768, which was established 6 years ago on October 10, 2002, and the stock market is most likely going to bounce around this major support area.

But can we think the unthinkable?

What if the S&P 500 Breaks the 768 Level?

If the S&P 500 Breaks 768, the Stock Market is in big trouble, as there is no solid support until the level of 500 on the S&P 500, a drop of 35% from 768, a drop of 41% from 850.



From the chart, aside from seeing the major support area of 768, we also notice that from 1995, the slope of the Chart increases to an unsupportable level, ending up in the Bubble of 2000. The Stock Market had no time to rest from 1995 to 2000, and there was no time to consolidate. This lack of stock market consolidation does not provide any good support for the market as it falls below the 768 level on the S&P 500. This could potentially mean a large drop (over years?) if the S&P 500 drops below 768.

View from a 60 Year Chart



Looking at the 60 Year Chart of the S&P 500, we notice the 60 Year Trend Line hits the S&P 500 level of around 400 at this time. If we look forward over time, this trend line would approach 500, which coincides with the predicted long term support level above.

Today's 15 Year Chart

3 Year Chart of the S&P 500 Index

What if S&P 500 Breaks Below 839? 60, 40 and 10 Year Chart View

Wednesday, November 12, 2008: The Stock Market as Represented by the S&P 500 Index went down 5.19% to close at 852.30.

Many people are concerned.

The most recent support area is 839.80 established on October 10, 2008. The S&P 500 could go down near this area and "test" support there.

The S&P 500 could successfully test and then bounce up.

Or, the S&P 500 could fail there, and go below 839.80.

Breaking below 839.80

If we break down below 839.80, the next major support was set on October 10, 2002, at 768.30. We could potentially reach there, and when we test, we could either bounce and form a very strong multi year double bottom (bullish), or we could break and fall much further down.



The Ten Year Chart Above shows the current S&P 500 value and the 6 year support of 768.30.

40 Year and 60 Year View



If we look at the longer term view, we notice that longer 40 year trend line from 1974 to 2008, shows that current support is around 800 on the S&P 500. The 40 Year Trend Line started around the major bottom of the great bear market of the early 1970s and continues today.

If we look at the 60 year chart since 1955, we notice a much lower support level of 400 on the S&P 500.

Watch the Tests

Let us observe how the stock market behaves at each major test point.

Today's Long Chart

Decade Chart

Have We Capitulated Yet in the Stock Market? We may break Records. Stock Chart Included.

The US Stock Market as represented by the S&P 500 index went down 78.5 points to 909.92 for a loss of about 7.9%.

We Are Near Record Levels

By almost any metric, we are extremely oversold and near historic levels.

Even before today's big drop, by many technical (related to looking at charts, and price and volume movements and other patterns) standards, we were in extreme oversold conditions.

We could also look at how overextended the S&P 500 Market is from the 52 Week High (and minimize the extension from the 52 Week Low), and we find that we are 42.30% below the 52 week high. In a previous study looking at the S&P 500 in relation to the 52 week high and low, from 1950 to March 2008, we are at the lowest levels since the great bottom of October 3, 1974 with the record of 44.11% HOLU value (mainly how overextended the market is from the 52 week high).

The previous study found that of the 59 trading days from 1950 to March 2008 with the HOLU value greater than 30%, the average one year forward annual return was a market beating 22.13%.


Stock Chart



Previously, we thought that the S&P 500 could hold at 1077, but if the stock market breaks this level, the Stock Market would truly be in trouble. This is the case today as the market sliced easily through 1077 and is now at 909 in a very short time.

We are nearing the congestion around the S&P 500 level 768 (the great bottom from 2002-2003 after the dot com bubble crash) to 936. We might have other support areas such as S&P 840, before we could reach the dot com crash bubble low of 768.63.

Perhaps we are headed towards a re-test of the dot-com crash bottom, and maybe we may form a bullish double bottom around 768.63.

Have we Capitulated and Surrendered Yet?

Common Wisdom States that Stock Market Bottoms often occur after we have Capitulation, where everyone gives up and surrenders on the market often with a crescendo massive sell off.

Today, you could really sense great concern. After visiting a bank, I heard someone say that it is official after looking at the business news program. I hear others talk about losing much of their money.

On common business programs on CNBC, shows such as Mad Money, and Fast Money, were replaced by world wide market news.

The word "crash" is heard all over the news programs. The word "Depression" and "Recession" is thrown around by many people.

The New York Times Internet Front Page talks about the "Markets in Europe and Asia Plunge" and "Nations weighing Global Approach as Chaos Spreads" and "Afternoon Turns Dark as Stocks Plunge."

Photos of traders in shock appear over all the newspapers.

News from around the world shows that many of the world markets are losing around 5% to 10% overnight.

Business programs keep talking about more problems in the future, hedge fund redemptions and record amount of mutual funds being sold as investors show real fear.

The Dow Jones Futures are down big, around 300 points.

There's a good chance that the market could open with a big gap down and continue to sell off. The Big Gap down is good, as this could often be an initial sign of capitulation.

Typically, massive buying comes in, shorts have to cover, and we establish an intermediate bottom and a tradable rally can continue.

But with all the problems all around the world, with all future redemptions still to come, and with traders not wanting to stay long before the weekend (October 10, 2008 is Friday), will we really have the capitulation bottom on Friday October 10, 2008?

But if one is truly a long term investor, this could be a great buying opportunity, or at least a good opportunity to continue accumulating index funds or ETFs for the long term.

Many times near market tops, we often hear that this time, it's different (to justify the market continuing to go up at a fast rate). We could apply this logic near market bottoms, where people proclaim, this time, it's different (to justify a much larger stock market fall).

One day, the stock market will stop falling. And for the patient, disciplined investor, now might be a good time to start or continuing accumulating.

Time to Start Accumulating? Where's the Bottom after Today's Massive Drop

Today was not a good day in the stock market, as the S&P 500 went down -8.8% from 1213.27 to 1106.42 (-106.85). The market broke below the previous low of around 1133.

Where's the Bottom?

Based on Previous Chart analysis, there could be a good chance that the bottom of 1070-1077 could hold. If the market easily breaks through this level, the market would truly be in trouble.

But we believe that the 1070-1077 level could hold.

If the market does get there, we will not necessarily go straight up. The Bottoming process takes time. In fact, we believe we could have a very volatile, very violent trading range, and we could even have a bear market rally all the way up to 1270, 1330 or even 1387 before re-testing the low.



The average bear market decline is said to be around 30%, and we are currently around 30% below the recent high of 1576.

1077 is also the 61.8% retracement from the 2002 low of 768.63.

Should we get back in the market?

While the market needs time to recover, it is possible that we are near the bottom.

It is difficult to time the bottom, but there are some possibilities:

1. It might be time to start slowly accumulating some index funds. One can invest a little bit at a time over the next year or so. Over the long term (10 years), people could say that this could be a valuable buying opportunity. However, we may have to withstand the great volatility ahead.
   
2. Start looking over potential buys for the long term. While it is not wise to try to catch a falling knife, keep stocks on your watch list.
   
3. Make sure you are not taking too much risk in your discretionary portfolio.
   
4. It might be time to review your goals. What do you want to do with the money you are investing? And when do you need it by?
   
5. Remember to diversify.
   
6. What sectors would be good to own at this time? Cash rich companies? Consumer Staples? Determine your strategy.
   

Today's 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

S&P 500 Trendline, Support and Resistance after Big Drop Today

The S&P 500 ($SPX) went down 38.82 points (-2.94%) to close at 1283.15.

Next support levels are the important 1270 and 1219 levels. (See the horizontal blue lines in chart above). The stock market could bounce on these support levels, or else these support levels could break and then we find new support levels and resistance levels.

Looking at the three year trend line (the blue diagonal trend line), we notice that that from 2005-2008, the blue diagonal trend line was support, establishing a trend. However, in 2008, we notice that the S&P 500 broke down below this trend line and remains below the trendline.

In chart analysis (also known as technical analysis), the usual rule is that support levels which have been breached now become resistance.

So now, the long three year trend line is the upper resistance of the S&P 500.

Let us first see how the S&P 500 behaves at the 1270 level, the first support level.

Today's Stock Chart

Stock Market (S&P 500) Short Term Positive, Intermediate Term, Still Bearish

After today's S&P 500 breakout above the 50 day moving average and short term downtrend, the stock market should have some short term momentum.

The S&P 500 is currently around 1350.



Next resistance area is around 1400 on the S&P 500.

Intermediate term, the S&P 500 is still on a downtrend. The S&P 500 is still below the 200 day moving average.

But let us see how the market performs as the S&P 500 reaches initial resistance (1400).

We might be in a trading range short to medium term, but looking towards the end of the year, it is still possible that we will still break down below 1270 on the S&P 500 based on a 5 year view of the S&P 500.

Today's 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

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

Possible Stock Market Breakdown Scenario on S&P 500

In the chart of the S&P 500, we notice that the patterns from November 2007 to December 2007 compared with the pattern from January 2008 to March 2008 are very similar. If the pattern holds, we can expect a further breakdown below 1270 on the S&P 500.

While not a guarantee, the S&P 500 could be forming a bearish formation, the inverted cup and handle pattern. The Drop to 1270 on January 2008 is the first part of the cup. The recent decline to 1282 could be part of the other side of the cup. If the pattern forms, we may see some sort of a handle, then eventually, a breakdown below 1270.

Again, this is only a potential scenario and not a guarantee that we will get a breakdown on the S&P 500.

Today's Chart with Info Above

Gold Chart Initial Price Target $1160

Inflation and Gold have been making the news. Recently, on CNBC's show Fast Money, Chartist Louise Yamada showed a chart of gold and made some analysis. Inspired by her work, we charted GLD, the Gold ETF. GLD appears to have a price 1/10 of the true price of gold. (If GLD is $98, then the price of gold is around $980 per ounce.)



In the chart above, we see a trading zone (triangle) from around $55 to $72. In the first leg, we see an increase from around $42 to $72, a gain of 71%. If we use this gain, and add it to the the trading zone base (near the end of the triangle), we get $116, or 71% above $68. This estimate matches what Louise Yamada mentioned on the air.

After this price target of $116, perhaps GLD will start consolidating, preparing itself for the next move (higher?)

Today's Chart of GLD

The Three Year S&P 500 US Stock Market Uptrend is Over

The Three Year (or more) S&P 500 US Stock Market Uptrend is Over.



In the chart above, we overlay a RAFF Regression Channel (the three parallel uptrending blue lines) over the S&P 500 from 2005 to the present. The Raff Regression Channel shows the general trading range of the S&P 500 and it shows a clear three year uptrend. However, it is clear that the S&P 500 has gone below the three year uptrending Raff Regression Channel showing that the uptrend is over.

Other Negatives:

1. The 200 Day Moving Average has gone down below the 50 Day Moving Average (The "Death Cross").
   
2. The S&P 500 is below both the 50 day and 200 day moving average.
   
3. The S&P 500 has gone below a three year trend line (the red line in the chart above)
   

Typically, what was once support now becomes resistance on the upside.

Re-Test 1270 Lows on S&P 500

Because V-shaped recoveries are not common, we continue to expect the S&P 500 to re-test the lows of 1270. The S&P 500 could bounce and possibly re-test a third time. Or, the S&P 500 could continue to breakdown.

We need time to determine whether we will have a sideways, but volatile trading range bound market, or whether we could establish a new downward trend or an uptrend after a lengthy bottoming process with enough successful re-tests.

Today's Chart of the S&P 500 with the Information Above

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