11/23/2008 8:21:13 PM

Welcome to the Advantage Report, this report summarizes the general market as well as the Nasdaq 100 and issues BUY or SELL signals when the conditions present themselves.

SPX Chart - Bigger Picture

An interesting picture seems to be developing for the medium term. We had been thinking that a low had been established and that we would begin to make our way higher, however this past week has shown there could be some more downward pressure before a bottom finally materializes.

It now seems that we'll either get some churning downward movement (what some call the "sand paper effect") before breaking out of the bullish wedge or, another move higher followed by with a short downward movement to complete a head and shoulders bottom.

The Christmas rally seems to be deferred for now but these recent events actually help improve the outlook for the first quarter of 2009.

SPX Chart - Shorter Picture

In the shorter term, the enthusiasm we were looking for didn't transpire and in fact, the market went decisively lower this past week. Once we got a close below 850, we quickly went to the 750 level. On Friday we even tested the old 740 support point that dates back to 1996/97, this held and we got a late day rally as a welcome turnaround.

We now seem to be at an unclear point for the near term, on the one hand we have a capitulation type bottom with a possible bullish wedge pattern and positive divergences, however on the other hand, the way the market dropped almost 13% over 2 days (Wednesday and Thursday), and this shows us that the market is easily spooked and can't be trusted. It's for this reason we are going into a stop signal (see below).

For next week, support on the SPX is at 740 and resistance is around 850.

The VIX Picture

Last week I spoke of two possible scenarios developing given the relative lack of movement in the VIX, I said, "either a level of complacency is returning in the market, where participants feel that things won't get much worse (which isn't great for the market) or there is some underlying strength that will be reflected in prices shortly."

Clearly the former was the case and we've now revisited the previous higher levels. Now a possible scenario is that we've made a double top on the VIX and it'll begin to head lower, which will lead to a rally on the markets. The next week or two should show us if this scenario has legs.

NDX Chart - Shorter Picture

While the set up seems very similar to the SPX, the internals are still hanging on to being long. In order for this to remain the case, we'll need to see a close above 1150 this coming week.

The bullish wedge is quite pronounced now and so we either grind a little lower this week or possibly break out to the upside. Of course, if the bullish scenario plays out then the general market is likely to lift in tandem also.

For next week, support on the NDX is at 1000 and resistance is around 1150.

General Commentary:

For the SPX, the system is now on a STOP signal (A separate email will be sent for this)

For the NDX, the system remains on a PRELIMINARY SELL signal, if weakness returns early in the week, we'll go into a stop scenario also.

The market has continued to take a battering this past week and while there may be a reprieve from the drop, we'll need to see a decent push higher (and no new lows) to undo the damage.

At some point stability will return and we'll see a decent rally ensue (and certainly around these levels seems like a good point to have that stability return).

As a side note, I was looking at the bear market of the early 2000's and at that time it took around 25 months for the SPX to drop 50%, this time we've done it in around 13 months. Even more staggering is that since September we are seeing huge movements in short periods, the latest being from the high on November 4, at 1007, we dropped over 25% in 12 trading days to go under 750!

These are amazing times and some people are doing well just sitting on the sidelines. Increasingly I'm hearing around the traps that day trading or "scalping" is the way to trade this market. I think there's truth in that also, however I also know that the market is dynamic, so if you begin to do well with your day trading, stay humble and be alert to flowing with the changes. Make sure you have a system in place that can bypass your emotions.

Quote of the Week:

The quote this week is from Miguel de Cervantes Saavedra, a Spanish playwright, novelist and poet that brought us the novel "Don Quixote", "Life is thickly sown with thorns, and I know no other remedy than to pass quickly through them. The longer we dwell on our misfortunes, the greater is their power to harm us."

Feel free to email me at angelo@stockbarometer.com with any questions or comments.

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