November 29th, 2008

S&P 1040 Here We Come

What a shocker. The TARP was torn and rejected at a loss of $1.4 trillion in market values.

The S&P 500 went through a second supporting trendline like a hot knife through butter (as my mother used to say) leaving the road clear for an attempt to hold the line at 1040, the level I estimate the next supporting trendline will be in “Where is Strongest Supporting Trendline” on Wednesday, September 17. That’s a mere 6% from today’s close.

Interestingly – and ominously – I heard little talk today of “capitulation”. Even though the VIX continued spiking even higher, few characterized today’s collapse as “nearing the bottom”. The most consistent comment were expressions of anxiety as we start seeing broader economic weakness in the third quarter earnings reports soon being released.

Here’s what the chart looks like after today’s drop:

The 1040 level isn’t a number taken out of thin air. Note all the congestion between these two trendlines back in 2004 (on the way up) and 2001-02 (on the way down). I’m guessing there will also be congestion (a consolidation pattern) during this bear market decline, as well.

During the recovery bull market that began on March 11, 2003 (I remember that because it was one of my best birthday presents), the market stalled for almost all of 2004 in what we later learned was a year long wedge consolidation pattern between 1160 amd 1050, a 10% trading range for nearly a year. You’ll also see consolidations on the charts many individual stocks during that same period.

For most of next year, we could possibly see an attempt to build a base between 1040 and 1130 as the market digest this year’s huge decline. Resolution of that congestion (will it be a bottom or merely a consolidation?) will depend on how successful the current credit crises is resolved around the world. A successful and smooth transition to a new President is also critical.

If by the middle of 2009, economies around the world don’t start recovering, the next target could be another base attempt at 940. That level would be a 20% decline from the neckline (see July 7), equaling the decline from the top of the head at the October 2007 peak to the neckline.

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