We reported two equity market bottom extensions in the Monday edition after markets began their decline on Friday. There have now been many more – too many to show here, so we will use the S&P500 futures contract as an example:
We remarked at the end of that Monday edition that it would be better to wait before covering shorts or buying for a bounce and the weakness that came next was quite severe. We expect that the worst of the drop is now over but that the bull market is broken – there were top extensions at every timescale on the way to last week’s highs, meaning that the market’s mood was reaching an unsustainable pitch. Accordingly, when these new bottom extensions have reached the end of their ‘shelf-life’ we expect further declines. In the meantime, it is likely that values of the main indices will fluctuate in a range that will be bounded by the recent lows and somewhere below the highs of last week.
This range that we expect will probably be much narrower than these very wide boundaries. There are already signs that the S&P bounce is having some trouble in pushing through the 2700 area, having rallied from 2529. The 170 point up move from that low of 2529 is almost exactly half the size of the drop from the all time high of 2878.50, which is typical of stock market reactions in bear markets. The actual ‘50% retracement’ level would be 2703.75 and it seems reasonable to think that the S&P will stall against it. The low point of the range is harder to guess (these are guesses, after all) but there were some temporary low points made in the area 2575-2595 in the most urgent part of the drop and these will probably support the price for now.
Bonds will probably not go lower and should be bought, based on the bottom extensions reported in that same weekend edition.
All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com
