The recent breakdown of the S&P 500 stock index through its October lows suggests there is further price declines ahead.
For traders, an outright sell signal was registered two weeks ago when the market moved below the important low of $83.58. One should be short from this level with corresponding stops just above the recent high (the day of the US Presidential election) at or near $100.86. As the chart above illustrates, we sold off tramatically into the November Options expiry last Thursday November 21st. And while that represented a nice profit on the short trade, we have neither hit the bottom of the current trend channel nor have we hit the bear flag target. This suggests that once the market has found buyers again we ought to see a serious test of that low (at best) and a punch through those lows (at worst).
For investors, there is no sign of a bottom anywhere in sight so one ought to sit on the sidelines and watch for the time being (once again!).
Considering the substantial bearish sentiment and where we are in the seasonal cycle, some sort of bottom should come in over the coming weeks/months. As a side note, the bear market of 1973-1974 saw the Dow finish the year at or near its lows in 1974 (only to reverse violently in early January 1975) so a similar performance shouldn't be too surprising. We are at about the same point in the 'fear' cycle (roughtly the 8th year of an expected 17 year cycle) as 1974 and the prospects of some sort of recovery now seem to hinge on the new Democratic President, Obama, and what his 'change' platform will produce. George Bush is a lame duck and shall ride out his remaining month and a half in office as nothing more than a spectator.
That's all for this week,
Brian Beamish FCSI
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