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S&P Crucial for Bulls to Run


Index key indicator of economic health.


"An optimist sees an opportunity in every calamity; a pessimist sees a calamity in every opportunity."
Winston Churchill

In The Consequences of Bailouts, I mentioned I'd put out a technical piece to show why, in my humble opinion, the 1,150 to 1,160 area for the second eldest sister (S&P 500) was so crucial for any bullish stance.
Minyanville's Why Wall Street Will Never Be the Same
To help explain, let's look at an article I wrote exactly one year ago, which defined the 10 recessionary periods within the U.S. economy since the late 1940. It outlined data from the US Census Bureau. and compared the timeframes to past bear trends in the equity market. The results were undoubtedly astonishing, considering our current location.

The title of the piece was "What if…?", and it came from my firm's attempt to technically ascertain -- if the economy was to go into a downturn -- where the market might go and the timeframe in which it would get there. The important thing to glean from the article is that, of the last 10 recessions, the average downturn in the market was 26%, and the average timeframe in which this occurred was 11 months.

Click to enlarge

From this, my firm concluded that, if the July 2007 top of 1,555 was the peak, it would drop the market to 1,150 by June of 2008. Well, as you all know, that didn't happen. I guess the crystal was cracked.

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Then again, on October 11th, 2007, the S&P 500 retested the peak of 1,555 and surpassed it intraday by a measly 21 points (1,576). Consequently, it marked the top by closing the day out at 1,547 in a Bearish Engulfing Key Reversal Day on what counts as high volume for all intents and purposes (1,550) - close enough for government work.

Anyhow, by extrapolating the same numbers from the original "recession" theory, my firm added 11-months to the peak of October 11th and dropped the market 26% from 1,550. This puts the S&P 500 at 1,147 by September 11th, 2008. (Missed it by ONE week!)

"To miss or not to miss," my technical scrutiny doesn't stop there. My real conviction about the infamous 1,150 number stems from 10 years of data, as seen in the chart below.

Click to enlarge

Most of my faithful readers have seen this chart many times, as I indicated what could happen if the 4-year cyclical bull trend ended. The chart represents an LT (long-term – 10 years) Floors & Ceilings support that's been supported 7 times prior. To my firm, this represented the next logical support for the markets.

If on a closing basis the market fails at this level, for whatever reason and God forbid, look out below. The next level of support in the S&P 500 is 1,045. That being said, 1,150 should more than likely be retested over the next few weeks - or days, considering the current volatility.

As always… Stay tuned & good luck!
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No positions in stocks mentioned.

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