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BREAKDOWN!
Chart Spotlight
by Carl Swenlin
DecisionPoint.com
March 6, 2009

At the end of last week the S&P 500 had declined to and had settled on the support created by the November lows. It was poised to either rally and lock in a double bottom, or break down. On Monday prices broke down through support, and by Thursday's close it could be said that the breakdown was "decisive". When a breakdown is classified as decisive (greater than 3%), it means that chances are very high that the market will not be able to gather enough strength to rally back above the recently violated support. Reaction rallies back toward the support are possible, but not guaranteed.

The monthly-based chart below provides a better perspective of the seriousness of the breakdown, and we can also see the location of future support levels. The next support is at 600, at the low of the medium-term correction in 1996. I do not consider this an important support level. The first important support I see is the line drawn across the 1994 consolidation lows -- around 450 on the S&P 500.

The market is now very oversold in the medium-term and long-term, but in a secular bear market this is not a cause for rejoicing. Bear markets can crash out of oversold conditions.

Bottom Line: The S&P 500 has decisively violated important support, and the most likely consequence is that prices will continue to decline, with 600 on the S&P being the most obvious level for us to see a bounce of any significance. While we could see a bounce before then, I think we should be more concerned that the decline will accelerate into a crash. There are still investors who have endured the decline from the bull market top and who were hoping that the 2002 bear market lows would mark the end of the current bear market. Now that long-term support has been clearly broken, another round of panic selling could be just around the corner.

. . . .

MAIL

Carl,

I'm sure there is an obvious answer, but why did the S&P 400 Mid-cap Index neutral posture instead of sell on 7/1/08? Just an oversight?

ANSWER: We use the mechanical Trend Model on the S&P 600. For full understanding you should read the Trend Model article in the Glossary. On the day the 20-EMA crossed down through the 50-EMA (a sell signal) the 50-EMA was still above the 200-EMA (still LT bullish), so the model turned to neutral. The model is designed this way to avoid whipsaw during bull market corrections. To get a sell signal, we need a 20/50-EMA downside crossover when the 50-EMA is below the 200-EMA.

Carl

. . . .

We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure.

Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.

© 2009 Carl Swenlin
Editorial Archive

CONTACT INFORMATION
Carl Swenlin
President
DecisionPoint.com
Redlands, CA USA
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