March 9th, 2009

Finding the Next Support Level

I first wrote about the double-top formation as the market made its November low. That was followed by a brief bounce and then the 2009 Bear Market (the more than 20% drop since the beginning of the year – so far). But the market is now struggling at another critical level.

The only way to understand this battle between the bulls and those pesky bears who always seem to be winning is to zoom far out and look at the very long-term picture (not unreasonable since this Bear Market Crash is of monumental proportions):

The various trendlines aren’t Fibonacci lines. Instead, these lines are placed at critical congestion levels at a slope parallel to the top-most line connecting the double top peaks. Each of the parallel lines represented boundaries of a range in which the market hovered as it cascaded down. Furthermore, the 2008-09 ranges paralleled similar ranges as the market expanded during the 1990’s to the Tech Bubble peak.

The market is currently at the bottom end of one of those ranges (680-740) paralleling a similar trading range in 1996 (600-680). One the one hand, everyone except for the Bears is hopeful for a 10% or more bounce from 680 to the upper end of the range at 740. As a best case, the bounce could carry the market up to the double-top’s neckline around 800-810.

On the other hand, everyone except the Bears is fearful that the market will break below the lower boundary of the trading range and tubble to the next supporting trendline which, unfortunately, is nowhere to be seen until the 420-480 levels. Pretty scary stuff.

If you recall previous postings on the topic, necklines represent half-wave marks, or way-stations, between peaks and troughs. The height of the tops usually equals (approximately) the distance from the neckline to the trough. The neckline of this massive double-top was 48% below the peak (in other words, the neckline level was 52% of the peak level). Measuring 52% of the neckline level today of 810 results in a value of 420.

Some may ask, “How can you be writing about a possible break to the 420 level when only a couple of days ago you were asking whether it isn’t possibly a good time to start buying?” In that post I offered a chart of the S&P 500 Index since 1939 showing the wide channel (+/- 44% of the regression line). If the market did break current levels it would signify a major departure from the market’s extreme long-term historical trendline. I don’t think it will happen, I certainly hope it won’t. But understanding both possibilities helps one to prepare for either eventuality.

As I said early, this is a Bear Market of monumental proportions (an understatement). In other words, it’s neither a time to bet on the end of the Bear nor is it time to anticipate further declines. As individual investors, we have no power to impact the outcome. The only safe course is to patiently observer as the big money Bulls and Bears fight it out and hope for the best.

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