50 More Points Down for the S&P 500?
Yesterday, I posted some ideas about what the S&P 500 might do next. However, I failed to look-up the destiny of a “rising wedge” pattern in the textbook. It turns out that a rising wedge is supposed to quickly fall back to its base.
I first posted about the rising wedge on May 6th. The chart below shows the original wedge pattern that I drew (using the SPX instead of SPY this time.) Notice how the market didn’t plunge immediately when it fell out of the wedge. I think that was because the NASDAQ-100 was actually leading the market. Also notice how the lower wedge line proved to be resistance, and that the collapse came when the market couldn’t recapture the top wedge line:
If this wedge fulfills the textbook pattern, the S&P 500 would drop to 1325, which is the point where the lower wedge line begins on April 15th. That would be about 132 for SPY, though looking at the SPY chart, it seems like there should be some support around 137. Since a wedge collapse is a panicky kind of thing, maybe SPY will plunge right through 137.
This morning, Helene Meisler speculated (subscription required) that we might see a rally to fill in the right shoulder of a head-and-shoulder top on the DJIA. However, now that the Dow has dropped another 146 points, that is no longer possible. The Dow has a similar pattern to the S&P, so I think this failure to make a right shoulder strengthens the case that we are really dealing with a rising wedge, and that we could hit 1325 very quickly.
May 24th, 2008 at 1:55 am
Helene also thinks that the DJ’s double top would drop to about 12300 which is the index’s April low. This would correspond to the S&P’s wedge bottom at 1325-1330 (April’s low). One problem is that the DJ has dropped to 12480, it woud take only another 180pts to meet the target while the S&P has another 40pts to drop. The S&P drop velocity has to increase much more to meet its April low target. I don’t know how this will work.
May 24th, 2008 at 5:22 am
Matt,
I’m seeing the same wedge pattern but with the uptrend line drawn from the Bear Stearns low with intersections on 4/15, 5/9, and 5/10 so I get the first break on 5/21. More or less the same thing.
May 24th, 2008 at 6:16 pm
Hi Ken,
Well, the DJIA is a price-weighted index, so there is no telling what it will do. I don’t know why a technician would use it to forecast the market, but Helene’s column is usually the first thing I read each morning.
Matt
May 24th, 2008 at 6:23 pm
Hi Akula,
Yes, I have that same trendline, and 5/21 was certainly the decisive break. The reason why I have come back to the wedge is to try and gauge how much farther the market will fall. Maybe the market was just temporarily shocked by the surge in oil. But if it really was the breakdown of a rising wedge, then we could plan on the decline continuing even if oil corrected back down. I’m thinking that the market was looking for a reason to correct and that oil was the convenient excuse.
Matt
May 24th, 2008 at 10:18 pm
Matt:
Great website. The technicals I follow say the gun is cocked for an upside move. The trigger might not go off Tuesday, but it may be time to consider lightening shorts.
Cheers,
Jim
May 24th, 2008 at 10:20 pm
BTW, 1325 came ip on my screen as support
May 25th, 2008 at 12:41 pm
Hi Jim,
Glad you like the site.
Which technicals are you looking at?
Matt
May 25th, 2008 at 11:59 pm
I also respect Helene’s comments very much. She’s probably one of the best technicians out there!
May 26th, 2008 at 9:07 am
Matt:
Advance decline line and associated volume. The oscillator I concockted moved into the oversold area on Friday. It won’t register a “buy” until it begins its trip in the other direction (overbought zone), but it is now officially oversold by my metrics.
BTW, Aunt Helen sure sees alot of head and shoulder formations, doesn’t she?!
Best of luck,
Jim
May 26th, 2008 at 1:09 pm
Hi Ken,
A little while ago, Helene made a comment on how everybody was trying to call a top in oil, but nobody was interested in shorting the financials. That was a great call - oil has rocketed up since then and financials have flopped. Long oil and short financials has been a winning trade for ages, and yet everybody is anxious to reverse it.
Matt
May 26th, 2008 at 1:17 pm
Jim,
Yes, the market is certainly oversold in the short term, but I think it might want to go sideways to work off the oversold condition instead of rallying. I’ve noticed the “L” pattern a few times that indicates that. For example, look at the intra-day chart for XLY on Friday - it dropped and then flat-lined to the close. Normally, that’s a pattern that might indicate support, but in this plunge it might mean that profit-taking shorts can’t produce a bounce because they are matched by new shorts coming in.
Yes, Helene certainly does like the head-and-shoulders formations. I suppose strong reversal patterns are not a bad thing to keep an eye out for.
Matt