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Wednesday, March 12, 2008

 

what am i expecting?


i laid out a base case some time ago for a bottom building that worked out pretty well -- albeit not from s&p 1380 (much to my chagrin) but from 1270 -- and now we're on the other side of it.

first -- consolidation. after yesterday, a revisitation of s&p 1310 is entirely in keeping.

following that -- i think this initial five-part decline is done -- so i'm essentially looking for a break to or above that december low of 1440 between the peaks to validate that an uptrend has been established. 1440 would be a 15% rally from s%p 1255 (the overnight low in the s&p futures market), and approximately a 62% fibonacci retracement of the fall from the 1555 high to 1255. getting much above it may prove just a headfake before the market heads further down in a longer bear market -- this upmove, as of this writing, seems to me essentially a countertrend rally even if it does establish itself going forward.

this would require first breaking up through 1378 and 1395 -- both likely to be consolidation areas.

but i sincerely would not be surprised to see s&p 1500-1525. it would constitute a return to the high end of the longstanding rally channel which held for most of the 2002-2007 rally. it would also be a move strong enough to force significant optimism (contra about the deep pessimism on display now, which is really very bullish).

the longer term picture of the nasdaq 100 will help the optimists build their case. there's nothing that looks so much like a breakdown here so much as a re-establishment of a more modest channel, and in a more confident manner than the financial-laden s&p. of course there's plenty of room to fall here -- the leaders of this index have been the golden children of the quants that dominate market activity these days, and are the best followed issues in the marketplace.

the first obstacle would be 1775 to break the immediate downtrend ceiling. past that -- consolidation at 1840 would be inevitable, it seems, but finally a think a possible target of 1980-1995 or so seems valid -- not only really important lateral resistance but also the approximate multiyear channel top. that would be 18% off the low.

again, i've no crystal ball and have to be looking always for signs of weakness. i am in some respects surprised that we didn't see s&p 1255 -- maybe we still will. we could yet get a second retest. but the first test looked very good to me, and i won't be surprised to see higher prices from here.

but -- in the longer run -- the end of shadow banking will have devastating consequences for global markets, and leveraged marketable assets in particular. i do expect to break below the rising bottom 2002-2007 trendlines -- those drawn from the 2002-3 lows -- in the coming year as real economic problems spawned in the credit crunch assert themselves through further forced deleveraging.

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