S&P 500 in Correction Mode

The S&P 500 is moving down lately. Let’s look at some chart perspectives to project possible near-term end points for the price movement.

Support, Resistance and Retracement:

The S&P 500 is approaching a potential support level at about 875 based on 20-day price channels. If it pierces that level and stays there for a few days, a much larger downward move is probable.

click images to enlarge

An extended decline below 875 might likely go to the 805-810 area as a 1/2 retracement, or the 750-760 area as a 2/3 retracement, from the recent peak.

S&P 500 Internals:

Several internal dimensions of the S&P 500 also point downward at this time.

The percentage of the 500 constituent members with bullish Point & Figure charts has crossed the 75% level (at 59%) level in a downward move. The ratio of new highs to new lows has crossed 25% (at 20%) in a downward move. The percentage of constituents above their 50-day moving average crossed 50% (at 41%) in a downward move. The percentage of constituents above their 200-day average is approaching 50% (at 52%) in a downward move.

The trading volume in the index has declined ever since the price level exceeded about 800 in late March.

Primary Trend:

The 200-day simple moving average is still downward sloping. The 200-day exponential moving average, while nearly flat, is still slightly downward sloping.

Linear Regression View:

Approaching the question of possible price ranges from a different perspective, linear regression best fit form various beginning points shows mostly possible price levels based on trend continuation.

The values for today that are implied by the linear regression best fit trend lines are:

• from Jan 1, 2008: 735
• from Sep 1, 2008: 787
• from Jan 1, 2009: 904
• from March 6, 2009: 960

Odds Cone Projection:

Taking a perhaps more balanced, not just downward view, a statistical probability approach based on prior volatility suggests theses price ranges to a 90% confidence level:

• 60 days forward based on 60 day history: 1020 to 784
• 60 days forward based on 40 day history: 1010 to 793
• 60 days forward based on 20 day history: 1003 to 700

Even though the odds approach is symmetrical up and down, we tend to put more faith in the lower ranges based on the the other decidedly negative factors discussed above. If the market does go up, 1000 to 1020 may be the limit for the next 60 days.

We believe we are in a correction phase at this time.

Comments

[SivBum:]

Besides what the chart says, the trend depends on what Ben Benanke says at 2:15pm, such as his take on recovery ( V, L, U, VL, W or Square-root) and mortgage interest rate moves.

Jun 24 01:45 PM

[Fred Voetsch:]

blah, blah, blah, blah, blah....

The market NEEDS to fill that gap left open from September at 11,000 but it appears that it simply can't so do. If not we are in an unprecedented period in the U.S. stock market. We have never had a decline like that (11,000 to 6600) without a retracement that "filled the gap" to within less than 10%. Even the crash of '29 provided an excellent retracement.

I believe that we have a "sell of a lifetime" opportunity with nothing in our way on the path to well under 5,000 on the Dow and the likelyhood that we won't see 14,000 again for another ten years.

Jun 24 03:42 PM

[AndrewBaker:]

As I've said elsewhere here, S&P 500 at 550 is technically arguable, and taking fundamentals into account, I agree that even though risk works both ways, it's unlikely that the move will be upwards. Maybe results season coming up will provide the nudge, maybe base/industrial metals falling back in price will do it, or maybe something else entirely will start it off, but a big downwards reversal is coming. The banks have not come clean yet, so maybe some real truth about their losses and writeoffs still to come will be the catalyst. Even the optimists should be looking at taking profits right now: even they surely cannot see the uptrend continuing.

Jun 24 04:02 PM

[Edward P. Cole:]

Fred Voetsch:

Why do you believe your blah blah blah comment is any more interesting than the article? a little narcissism maybe?

If you are going to criticize author content, at least try to raise the bar with your comment -- your is blah blah blah without support.

I notice that your site doesn't enable comments. You can obviously dish it out, but apparently you can't take it?

Ed

Jun 24 09:11 PM

[Mad Hedge F...:]

No doubt. Now that we are solidly into a correction, I have been flooded with requests from readers to call the next bottom in the S&P 500. Well here it is. Brace yourself. Put it on a Post-it-Note on your computer. It is without a doubt and unquestionably going to be 880, 850, 830, 800, 750, 666, or 320. That last number works out to be 90% of the book value of the S&P 500, which was the low seen in the 1930s depression. Yes, that depression, not this one. You are really asking me to solve a one billion variable equation, because that is the number of direct and indirect participants in global stock markets. If the few green shoots out there start to die off, the meltdown in commercial real estate accelerates, the Fed missteps by draining liquidity too soon, or there is another unforeseen shock to the system, then you can go with the lower of these numbers. If we are distracted by the health care debate, emerging market economies continue to perk up, and this strength helps our technology stocks stay alive, then sleepy narrow trading ranges will dominate, and the higher support levels will hold. But no matter what happens, I will be able to come back to you in three months and claim that I was right.

Jun 25 09:04 AM