SPX Technical Analysis

Bear Market

Last time we said, "if the SPX closes obviously below S1 (and not 100 points below S1) we'll exit this market immediately expecting significantly lower prices." S1 failed on 01/16/08 closing at 1373.2. The break was out of a triangle bound by R1 and S1 that was about 110 points wide at the break. This implied a drop of about 110 points below S1 taking the SPX down to 1270 which occurred exactly. This was followed by a run back to S1 retesting the old support.

Now it appears that the SPX has formed a downtrending channel bound by S2 and R2. The SPX is about halfway up this channel. Considering the recent interest rate cuts by the Federal Reserve we believe it's likely that this rally will continue taking the SPX up to R2 and possibly as high as R1. However, we believe this is a bear market rally and that the SPX should trend lower supported by S2. Eventually, S2 will probably eventually fail resulting in a bit of a panic that could result in a significant bottom around 1000.

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As you can see in the longer term graph of the SPX, a very important uptrend line (S3) failed that in combination with the S1 failure spelled the end of the bull market. In hindsight we should have exited upon the S3 break but we believe our exit will look very good in the coming months. We would not be surprised if the final SPX bottom occurred at S4 which is the old Head-and-shoulders neckline that launched the bull. This would be about 35% off the top which we believe is reasonable for this bear market.

Interestingly, if we do get a decent rally here, we're going to worry greatly about a possible Head-and-Shoulder Top (HST) with neckline labeled NL? above. The height of this HST, which would be the minimum downside objective if NL? were to fail, would take the SPX down exactly to S4.

Having said all that, we'd start to consider our bearish opinion incorrect upon a break to the upside of R1. At which point we'd start to look for a low to get in on. Other than that we expect to be on the sidelines for quite a while as this market corrects.

As always our personal mechanical models will continue to manage their capital mechanically but we have switched to very conservative models across the board with preservation of capital the top goal. As this event unfolds investors should prepare for another spectacular buying opportunity near SPX 1000. Certain assets are going to be battered and it will appear to be the end of the world for them, the perfect time to buy them.

At this point we will not take long positions in the SPX unless conditions change rather drastically.

NDX Technical Analysis

NDX Nearing Support

First off, considering our bearish opinion of the general market, there's no way we'd take on NDX risk. However, we will be watching the NDX 1600 level closely (S1). If S1 is taken out it will imply significant additional downside for the NDX and will confirm our opinions for a possible 1000 SPX in the future.

At this point we will not take on NDX risk.

RUT Technical Analysis

RUT About Halfway Down

The RUT has two lines of probable support at around 550. S1 is an uptrend line drawn off major bear market lows and S2 is drawn off the 2000 top (old tops often provide support for a dropping market). An RUT drop to 550 would probably coincide with the SPX at 1000.

At this point, we see no good reason to take on RUT risk.

XAU Technical Analysis

Has the XAU put in a Significant Top?

In 2007, the XAU broke out above S2, this break implied a move equal to the width of the horizontal channel which was 40 points. Another way to look at it is that the S0/S2 channel top was 33% above its lower boundary (S0). A 40 point move above S2 is 200. A 33% move above S2 is 213. Therefore, between 200-213 is where one would expect the XAU to move based on the channel break. We've hit that objective and the XAU has fallen back.

The XAU is right now trading below S1. S1 is currently at 185 and the XAU is at 181. If the XAU closes below S1, we believe that a drop back down to S2 at 160 becomes likely at which point we'll become heavy buyers.

We are looking to load up on XAU related stocks when the XAU reaches 160.

A Classic Chart, GOOG...

If our bear market scenario plays out like we think, Google should drop to at least 250. The collapse started with a break out of a well-defined Symmetrical Triangle bound by S1/R1. Then a perfect Head-and-Shoulders Top (HST) formed and was confirmed with a gap down below the neckline NL. Now it appears GOOG has found a short-term bottom and may break R2 to the upside. This should result in a perfect retest of NL and a close of the break down gap.

The height of the HST is about 270 points which makes the eventual downside objective around 210 for GOOG. It just happens that GOOG was resisted on the way up by 200 for about six months starting back in October 2004. Therefore, 200 should provide support on the way down. Honestly, it looks like 2002 all over again...