Peeking below at support for S&P500 and DJIA under the November 2008 lows

While it might seem scary to look where the markets may go if they move under the November 2008 lows, it's worth taking a serious look for potential support at lower levels. The 640 level in the S&P500 is one of the potential projections of a bearish Elliott Wave triangle in the SPX, as I mentioned in yesterday's post here on that topic. Andre Gratian also mentioned that number in his prior weekend update, as a projection he's worked out.

Below, I'm borrowing Tony Caldaro's monthly SPX chart to illustrate another dimension of significance to the 640 level. But first, a quick peek at how the triangle would look in the Dow Jones Industrial Average. Using the main triangle count shown on this chart yields a conventional 5th-wave-down target at 6,743:


Notice that Tony in his monthly SPX chart (below) identifies 640 as the Fibonacci .618 retrace back to the lows of 1974. Purely on the basis of Fibonacci trading setups, this tells you that the potential for a tradable bounce is offered by this significant support level. Indeed, given that it's calculated on a monthly chart spanning a 30-year time period tells you that it's also an investable bounce for those who don't like to sell securities within weeks, days (or even hours) after the purchase.

Notice too that the October 2007 high in the SPX wasn't much higher than that of 2000, so just looking at the chart with the Fibonacci retrace levels gives you the feeling that simply dallying around the .50 retrace level - again, after having been already about that level in 2002/2003 - doesn't give a good sense that the SPX gets enough support from the .50 level and "needs" to dig lower to the .618 for potential support.


What implications might this have for Elliott Wave? It's interesting that the .618 retrace level is commonly the amount of pullback traced by a second wave. It implies that there is actually a possibility for a trend reversal to a third wave (in this case, upward). Yes - it really is the unthinkable, isn't it - going against the grain of what EVERYone is talking about - the idea that the markets could bottom a huge second wave and then enter a huge new bull market with a massive third wave?! Well, perhaps there are some talking about the idea of a huge new bull market ... not really what I'm seeking most talking about ... and my guess is that if the markets do plunge in a scary thrust down over the coming weeks, to the SPX 640 level, any voices crying "bull market" will either quaver into silence or be shouted down by "all reasonable people".

I made a post some time ago, under the "Equities" and "Elliott Wave" labels, that included a very long term chart of the DJIA going back to the 1930's, and showing that the market actually still remains within its uptrending channel lines. It is possible that the DJIA could still be contained within those channels, if a plunge there is a fast fifth-wave thrust down from a triangle that reverses rapidly upward.

Here's how my DJIA monthly chart looks now. My thought has been to use the Fibonacci levels that retrace back to 1982 as well as 1987. And I still think these are reasonable levels for potential support. Using these, you can see that that there are support levels not too far under the 2002/2003 lows that could contain another move down in this index (and even provide more potential for rallies after that). The .618 retrace to the 1982 lows is at 5900, and the .618 retrace to the 1987 lows is at 6,427 (not very far off from the 6,743 main triangle target I showed above):


Speaking to Elliott Waver analysts out there, I'll grant you that the markets don't "need" to plunge down under the November 2008 lows over the coming weeks. There remain Elliott Wave potential counts that have the markets going to new bear market rally highs first. In fact, this seems to be the consensus of many, or was until very recently. And Tony Caldaro has been showing alternate counts for a while now, with the bear market rally count shown in his SPX chart and the plunge downward count shown in his DJIA chart. There's even one that has the markets making new all-time highs first! Frankly I'm not going to revisit or show those, unless the markets first exceed Wednesday's high and then exceed the January 6 highs.

There are also different ways to count the Elliott Waves for a move down. Prime example, 640 is one of the main triangle target objectives that would make the move down a fifth wave (and the drop from the January highs look like the 1st wave within that fifth wave). If it counts out as its own ABC zigzag (with the drop from Jan. 6 either wave A, or the 1st wave within the A-wave) then it could reach lower, and I'd be looking at my larger "C" wave objective on my SPX monthly chart (which points to levels under 600 in the SPX). First, let's see if we get under 741 and then what the wave structure is looking like at that time.


By the way ... just to make sure no one is confused - since I do speak (as I should) in terms of probabilities and not guarantees ... the markets look unsafe to me, for any long positions (except occasional daytrades or perhaps swing over a 2-day time frame on rare occasions), unless they exceed the January 6 highs without making new lows. The high on Wednesday marked the .618 retrace back to the January 6 highs for the QQQQ and the .50 retrace for the SPX, and fit within the parameters of what I showed last weekend for a likely B-wave pullback upward. That was the likely trend reversal point. True - I'm considering the banking index and US Steel (X) as long candidates that might not join in a plunge downward - but if they violate the recent swing lows then I'm stopping out, to re-evaluate those. Also true - the markets could make rally efforts again toward the January 6 highs - but there is no substitute for actually going above them.

Therefore, either be short or be in cash unless you really know what you are doing in any fast (day) trading (normally I'm not this explicit but concerned if anyone doesn't understand this). Good luck out there all and happy trading!