Musings on where the market is and where it's going

It is my opinion that currently I am going to wait to get into any positions until this whole bailout thing is done and over with. I have a sneaking suspicion that some form of the bill will be approved and thus will cause a massive rally in the broader indices and thus I want to stay out of way of that. Plus it will also bring about better levels to buy puts and will also bring down the CBOE VIX (options volatility which will make options premiums cheaper).

The problem with the U.S. is not just with the banks and the credit crisis it is that the economy is complete crap too. Some people are predicting unemployment by next year will be 7.5% compared to the current 6%! GDP is looking to go lower year over year and thus will present even more bearish opportunities!

With that here is the chart of the S&P:

Monthly:


Okay so firstly I zoomed out to a 20 year monthly chart and I noticed that there is a 20 year trendline that stops at that previous bear market and will continue. In today's terms the trendline stops at 950! Anyways as can be seen from this 15 year graph it shows the previous bear market and when the MACD crossed over the zero line that was about 50% of the move. If we extrapolate this to where the S&P is where it crossed the zero that roughly puts us around 900 (pretty cool how they all end up at the same place). Also as can be noticed the fibonnaci retracement level (78.696%). The big levels on the S&P are: 1260, 1170, 1070, 1000 (mental), 940, 775 these are the fibonacci levels. For those that don't know Fibonnaci levels are based off of the Fibonnaci numbers which are seen prevalent in nature, mathematics and obviously the stock market.

So that's the big picture as to where we are most likely going. The market hasn't found a bottom there are no characteristics of a bottom yet (there are never V bottoms in a bear market there has to be a retest of the support level at least 1 time and maybe 2 times to form a double or triple bottom respectively). As far as the length of time that this might take... if you use the same length that the previous bear market took sometime next year.

Here's a shorter term perspective of the S&P:

So here is a "shorter" term chart of the S&P as can be seen the S&P has been in a declining trend channel since October of last year. The most important thing to notice is that the trend is DOWN and that we are also at the lower end of the range. I am going to say that we are probably going to have a bounce off of this trendline (and we probably will be having a bounce once congress approves the bailout) and that we will go up to the important resistance between 1230 and more importantly 1260. This is where I am looking at getting into the puts is after this bounce back. Furthermore as can be seen the MACD is clearly on a downtrend as is the RSI. The important thing of note is that the RSI has not poked through the 30 level yet on the weekly nor on the monthly.

So in conclusion we'll probably see a bounce after the bailout with the S&P going back up to test the 1260 level and then will quickly fall back to this level. Look to get into options at these price levels as the VIX will have dropped and the options will be less pricey!

Good luck!

Jason