January 16 2009

LET'S LOOK AT THE S&P 500 DAILY CHART

Last time I was on Squawk Box was January 2nd and I put this chart up showing the price and time probabilities for this rally to top. The index did show a top within the first time period and at the lower end of the price window. At the time I thought there was also chance to come back down and test the higher low and then rally back up to test the high and again fail and resume the downtrend. This would leave an obvious distribution pattern. But stocks look so vulnerable there may only be a bounce of one to three days from this price level and then make a run through the November low. The second time window is 60 calendar days from low or next Tuesday and that could be an end to the rally.

NOW LET'S LOOK AT THE WEEKLY CHART

There are few things worth noting on the chart. Fifty percent of the high price is extremely important. In stock indexes that is almost always a bear market low; it was in 2002, 1974 and 1938. Historically when a market starts to actually trade below that level, and not just spike and recover as just occurred, it has some doom and gloom consequences. So the price of 790 is very important on this decline. There is support below the low at 720 and 640 but trading below 50% of the high opens up some very bad probabilities. There are two exhaustion or spike moves down, one in October and one in November and in most instances a third thrust or exhaustion will end the down trend. There are three descending trendlines so if the index is starting down from this weak rally then another capitulation or exhaustion move down will occur. So there is one thing on this chart that is encouraging and that is the two previous exhaustions and now a possible 3rd.

The only problem with this forecast is it is becoming a consensus among technical analyst mainly due to the Elliott Wave practitioners. I would rather be hanging out alone with a forecast than becoming part of the mob. But I really can't find any fault with my analysis yet since it went right into the price and time window for top. But I am sure there is a surprise setting up here somewhere.

One last comment please, this is "Deflation" and governments cannot control deflation. Monetary policy, interest rates and stimulus programs are not the answer. Maybe you could have a guest who could explain deflation, what it is and what the consequences are and how to live through it.