Thursday, August 26, 2010

Big-picture perspective on why the stock market is weak now

Here are some perspectives on the stock market's weakness. I've marked on my daily S&P 500 chart some of the pivots and patterns to help track the market's movements. While we are looking for a trading bounce currently, the predominant swing trade position is in sell mode from the drop out of the wedge shape and the August 20 area (lower) high. Loss of the 1090 pivot pointed lower and the market is now grappling with the 1060 pivot and 1040-ish area. On my monthly chart, we see that the market's high was almost a Fibonacci .618 retrace of the drop from the 2007 high to the 2009 low. Then the drop in recent months has retraced a Fibonacci .382 back to that 2009 low. Looks like we're in for a deeper Fib retracement, unless the picture is even more bearish such as the "Prechterian" third wave down. Point being, if and when we lose the 1040 area, it points lower to a 50% (about $SPX 944) or 62% (about $SPX 880) retrace as marked on my monthly chart. Assuming we get there, by that time we should have a better idea just how bearish the bigger picture is becoming.

There are still scenarios that can be bullish ... After the completion of the pullback that appears to want a deeper retracement. One example being Tony Caldaro's wave 2 concept. But let's focus on the weeks ahead first. Trading basis we'd like to see an oversold bounce and let's see if it happens and can get to SPX 1070!

PS: I hear that Goldman Sachs is seeing a large bearish head and shoulders targeting 900 or under for the $SPX. That would fit with the 62% retracement target. If we see that area then it should be a buy, either very long term or at least for a while. So that's an area to consider even if we don't get all the way there by October or November.

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