S&P 500 Index (SPX) Chart Analysis
Last week we wrote:
"...A week of extreme volatility, but this time the S&P 500 Index - SPX ended with a gain. In normal times, a 4.7+% gain for a single week would be a wildly bullish event, but these are not normal times. Instead this is just potential bottoming action as the markets try to sort themselves out and traders take positions on either side of the action, both bullish and bearish."
This week
The S&P 500 Index - SPX is, in our opinion, the most important index when trying to peer into the future of the stock market. The SPX covers the 500 largest companies covering all major industry sectors. That is why we spend so much time on the index in this report.
We again have three charts below, a daily and weekly chart of the SPX as well as a weekly chart of the CBOE Volatility Index - VIX.
After a down week, the world markets appeared to have crumbled on Friday, and it looked like the U.S. markets would open with huge losses, possibly losses indicating a crash. Futures were limit down and trading in them had been halted.
If the lows indicated by the futures were reached, we would be in a new leg down as all support levels, created in the last three volatile weeks (however tenuous these support levels are), would have been decisively broken.
But the markets held up and so did the support levels as buyers stepped in. By day's end, the major indexes closed with about a 3% loss. Traders were actually happy with that loss as it was so much better than what they were expecting before the markets opened for trading.
In some respects, a huge down day would have been better as it would have signaled capitulation, and likely the end of the bear market. Instead, we have a somewhat bullish response as markets held up, and the expectation for a bounce next week is good. Though without the capitulation day, the bounce may not be from a final bottom for this bear market decline.
We have all heard the saying, "Bull markets climb a wall of worry, and bear markets descend a slope of hope."
Unfortunately, hope was kept alive in Friday's reversal from the abyss. To contrarians and technical analysts, that points to potential lower lows in the coming weeks or months.
But for the short term, the markets are so oversold that a rally may very well be in the cards.
The SPX came within a fraction of issuing a buy signal early this week, but now has pulled back considerably from it. The NDX did issue a buy signal (analysis below) and is a small fraction from reversing back to its original bearish stance. As of Friday's close though, the late day rally has kept the NDX position bullish, at least for now.
Both the daily and weekly chart of the SPX (below) show that the index has held above the lows reached three weeks ago, but that it did make a lower close than we had three weeks ago. Technically this is bearish, but we may still have a short term bottom in here. There has been so much selling, for so long, a rally is overdue.
You have all heard the term "oversold" and this is where we are. In fact, the SPX is more than 25% below its 50-day moving average and this has only occurred some six times in history, with most of those times during the great depression. All of these extremely oversold events were followed by substantial advances.
Could a real bottom be in? Anything is possible. Every bear market writes new rules into the history books. This has not been a typical bear market in any way, so why not rewrite the bottom testing rules?
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The only major lows unbroken are the 2002 bear market lows at SPX 769.98. Can we reach those lows? There is no way to tell, but why not? Typically when supports are broken we reach the next one. In this case, the next one is at those 2002 lows.
Because the October 10th lows have held for three weeks and several attempts by the markets to push below it have failed, we "may" finally see some upside. But after the buyers run out of steam, the real test will begin.
Last week we discussed the CBOE Volatility Index - VIX. It has reliably signaled turning points in the market when it rose above 30 and especially when it touched the 40 level. During the 2000-2002 bear market it reached into the fifties a couple of times, accurately signaling bottoms.
Last week we watched the VIX rise above 80 intra-week. This week it reached close to 100 intra-week, closing at 79.13, the highest close ever recorded. The VIX chart is telling us fear is at historic highs and a market bottom is close. But we would have written this same sentence weeks ago, and the markets have since suffered huge losses. So VIX is signaling a bottom is near, but it is not telling us a bottom has been reached.
If we do turn higher next week, there are short term resistance levels at SPX 1074 and then SPX 1130. To get there would take a huge rally, so let's just say there are resistance levels far above where the market is this week.
The SPX remains well below both its 50-day moving average (25.8% below to be exact) and its 200-day moving average. Both averages are in steep downtrends. They will not be reached anytime soon.
Conclusion?
The stock market is likely near or has reached a short term (and possibly long term) bottom. It could have made its lows intra-day on Friday October 10th or those lows could be several weeks away. Subscribers should be in bear funds or cash for the SPX position, according to whether you are an active or aggressive timer.
The strategy remains positioned for continued declines but is closing in on active and aggressive trader buy signals.
For subscribers who overly worry about short term swings in the financial markets, remember that you do not have to be an aggressive timer to be a profitable timer. This strategy can and does incur small losses on occasion. Money is made in both aggressive and conservative style trading. Our Conservative S&P Timer strategy trades only the long term trends but that means it profits without the numerous buy and sell signals that active and aggressive traders take. The Conservative S&P Timer has been in cash since January 7th.
The SPX portion of this strategy is in a BEARISH position. Active traders should be in CASH (money market funds). Aggressive traders should be in the Rydex Inverse S&P Fund (RYURX) or other bearish SPX index fund.
S&P 500 Index (SPX) Daily Chart
S&P 500 Index (SPX), Weekly Chart
CBOE Volatility Index (VIX), Weekly Chart
Nasdaq 100 Index (NDX) Chart Analysis
Last week we wrote:
"... The Nasdaq 100 Index - NDX posted gains this week, though it gave up a good portion of what it had achieved intra-week, closing at $1311.72 by Friday's close. The daily chart (below) shows that the NDX managed to close the gap created three weeks ago when the index fell below the July 2006 lows."
This week:
Strength early this week in the Nasdaq 100 Index - NDX triggered a buy signal for this portion of the strategy.
The selling on the last three days of the week did not manage to trigger a new sell signal, but it did come close. Any losses by the close on Monday will undoubtably push this position back to bearish.
Be sure to read the signal though, "if" one is issued. We are likely to exit to a cash position for both active and aggressive traders. With the market this low and at such oversold levels, the expectations for a rally make any new bear fund position too risky.
Of course the strategy is still telling us the NDX is going to advance, so Monday will be an important day.
The weekly chart shows the NDX close to the 78.6% retracement support level for the entire advance from the 2002 bear market lows. This is a huge support level and because of the size of the declines to date, we are testing it now. You do not have to hit a support level exactly. They are just levels that typically result in reversals, if a reversal is going to occur.
Wave analysis has the NDX only at the bottom of what looks to be a Wave 3. Typically there are 5 waves in a completed major trend so the Elliott Wave's are calling for another and final wave down.
We are not forecasting this. Wave analysis is an excellent tool for trying to peer ahead into the murky future but it often has multiple levels of other larger waves that can make forecasting difficult. It is much better after the fact unfortunately.
Last week we wrote, "A Wave 4 advance could trigger a bullish signal if it is strong enough. Of course a Wave 4 advance would not last very long. These are not normal times. We could reach that 1106 level, or stop declining right here."
This is what the current bullish signal is calling for, though that signal is either a bit early, or may turn out to be incorrect. Early next week will tell.
In the weekly chart you can see that this week we again closed below the 2004 correction lows at SPX 1302. This close below major support forecasts a decline to the next support level at NDX 1106. This forecast could be for the current decline or for a new decline after the NDX rallies.
These are historic times and as such, the markets are quite likely to follow different paths than what we expect. Technical analysis tools that have worked for years may not work in this decline.
But following trends always works. That is why we were bearish for most of the decline and why we will catch the majority of the uptrend when it finally materializes.
The NDX portion of this strategy is BULLISH. Active traders and aggressive traders should be in the Rydex NDX 100 Fund - RYOCX (or other bullish NDX 100 index fund).
Nasdaq 100 Index (NDX), Daily Chart
Nasdaq 100 Index (NDX), Weekly Chart
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S&P 500 Position - 
Nasdaq 100 Position - 
