Will it hold?

August 22, 20111 Comment

My appologies for the lack of chart on todays post. I’m having some computer difficulties that will be fixed by next week’s posting.

In my last post I mentioned that I felt the August 8th lows of S&P500 near 1120 would likely be the lows of the current bear market. I did mention that there would likely be at least one retest of this level (if not several tests) in order to create a proper base for the market to spring from. Last Friday saw a retest of that level. Our question should now be–will it hold?

 This week will be critical to prove if 1120 will hold or not. I’d give it a good chance that it will, but as traders, we must patiently await a bounce from 1120 before we commit any more cash to this market. Should the S&P fail to hold 1120-ish, the next level of support lies around 1050. I would suggest that this level is a worst-case scenario. I am not in the camp of pessimists who foresee a return to the 2008-2009 bear market levels. Economists give the chance of a double-dip recession as fairly low (most foresee slow growth instead). Further, the corporate earnings scene is substantially better than it was 2 years ago. Rather than earnings deterioration, we are witnessing earnings growth surprises by over half of the companies that comprise the S&P500. This provides a floor to just how low markets can go before turning around, in my opinion. But, being a technician, perhaps I should just stick to what I know best: charts.

 I will say it again: the recent combination of oversold momentum oscillators, sentiment indicators and levels of support at recent levels drive me to think that we are witnessing the formation of a base from the recent selloff. This  basing activity will take a while to play out. My caveat is that a break of 1120 will likely see a move into the 1050 area for the S&P 500, which is a “livable” downside from here. While there is always the potential for a new bear market to emerge, I am optimistic that this would be a less likely situation.  Exercise patience, wait for the market to prove it has found support, and look for your entry points.

One Comment

  • You suggest 1050 for $SPX is “livable” downside. That is another 6.5% down in
    addition to the 18% down since the first of May. You must have a high pain tolerance.

    I’m glad I’m in cash!


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