Why The S&P 500 May Be Heading For 1,170...

The markets cooled a bit yesterday, and this morning's pre-market activity has been pointing toward a soft opening. The question is whether the market is consolidating the recent gains before heading higher, or was this buying just a short-term recovery from over sold conditions and we're about to resume our downward trend.

To gain some perspective, I have two charts from the MarketClub service for us to review. They are both of the S&P 500, but one is a weekly chart while the other displays monthly bars.

I won't post the daily, but you can very easily pull that up yourself. We have a recent green trade triangle from the MarketClub service on that chart, as well as on the weekly chart (above). You could get long here, but you would want to maintain a tight stop.

What I want to point out on the weekly chart above is the red, down sloping trend line. We are still in a downward trend and have rallied off of a recent low. I might get more confident about calling a bottom if we test that low and see it hold.


This second chart is the monthly. You'll notice that our last major bottom was back in March '03, and that we enjoyed a significant rally off that bottom that carried us through December '07. That's a long run.

I have inserted Fibonacci retracement levels. You'll see that the first level has held, but we could very well see the market retrace to the 50% level at about 1,170 on the index. Notice that the monthly chart has not produced a green trade triangle and we are still operating under the red triangle generated back in January.

What does all of this mean?

It means that we've rallied off of recent lows, but we don't know if this rally will turn into a new bull market trend. We may very well return to the current bear market trend, or see the market consolidate. The point is we are at a point where we need to see what develops while being cognizant of the "big picture."

Calling a bottom right now and jumping in with all your capital is ill advised. If you want to get long, be judicious. A couple in-the-money call options may be a safer means of taking a long position than buying the underlying equity. You can always exercise your rights under the options to buy the stock or sell the appreciated calls to help finance that equity purchase. If this rally fails, you have less at risk.

More technical analysis lessons from the Traders' White Board series are coming as we get closer to the weekend, plus I hope to have my review of Bill Poulos' ETF Profit Trader posted.

So far, I'm impressed and believe that he has done another expertly fine job. Let's see if my opinion holds up as I finish working my way through. Take a look at yesterday's post if you would like to get some additional information.

Trade well!

Christopher Smith
TheOptionClub.com