March 11th, 2008

Next Way Station on Road to 1150 on S&P 500

Forget all the buzz about a double bottom. It’s not going to happen. It looks to me like the momentum will continue to push the S&P 500 average down further. If you have any doubts, look at the charts I included in my March 1 posting entitled “1973 and 2001 Market Crashes and Today’s S&P 500 Index“. In that piece, when the S&P 500 closed at 1330.63, I wrote:

“when that crossover occurs, sometime around March 11, the market will resume an even more accelerated decline. The next support areas appear first to be around 1233 (down another 7.3% from here) and ultimately around 1150-1175 (another 11.0% from here). That later level would leave the market 25% under the all time high of 1565 set on October 9.”

This projection still looks to be on the mark. Yesterday, March 10, the market closed at 1273.37. So it’s not far from that 1233 mark, a stepping stone on its way to 1150-1175.

As a result of the index’s steep decline over the past several trading sessions, the market may be oversold. This morning’s dramatically higher open (high of 1303 so far today) resulting from additional emergency steps taken by the Fed will, I believe, merely provide an opportunity for shorts to cover.

The Index is significantly below all the moving averages making up my momentum indicator, each of which is also falling precipitously. A bounce at around 1233-1250 will also serve as an opportunity for those who’ve been waiting for it also to seize the opportunity of “selling into strength”.

Strictly from a technical perspective, I can envision several possibilities extrapolated from here:

  1. the index stalls momentarily before resuming its descent without crossing back over any of the moving averages and the moving averages retain their alignment
  2. as the index stabilizes it crosses back over the 60-day moving average
  3. as the index stabilizes it crosses back over the 60-day and 90-day moving averages
  4. as the index stabilizes, the 60-day moving average to cross back over the 90-day moving average
  5. as the index stabilizes, the 180-day moving average rises and crosses back up over the 300-day moving average.

Each of these are distinctly possible and each presents a different picture of the strength of the market’s momentum at that instant. Over the past 40+ years, the market has witnessed mirror images of this situation, each presenting a different set of probabilities of possible resolutions. I outlined a number of them on March 6.

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