Stock Market Index Analysis: Predicting An S & P Reversal

by The Smarter Wallet on April 27, 2009

Be prepared for the next stock market dive.

Curious about how some traders are determining where the stock market is headed? As part of getting myself oriented with technical stock analysis concepts, I’ve signed up to INO.com to check out what some stock market experts feel about the current state of the markets. I am learning quite a bit by just following what they have to say as they cover and track the behavior of various markets, indexes, stocks and other asset groups with the use of charting techniques and tools.

Permit me to share some insights with you, that were made by the trading expert behind the investing tool and stock charting service called MarketClub. Using their charting software, Adam Hewison shows us why he thinks we’re headed for a fall in the U.S. equity markets. With the S & P lingering in the 800’s, the index looks ripe for a reversal and a potential testing of the previous lows established in March 2009, when the index hit 665 points. Check out this video where Adam shares his thoughts:

Stock Market Index Analysis: An S & P Reversal Ahead?

Click this link or the image below to watch the video about one trader’s view of where the S & P is headed.

S & P stock market index analysis

I’ve picked up these ideas from watching the video: according to the following justifications, the probability is high that we are headed for a downturn in the near term.

1. The stock market retests a bottom before making any meaningful shifts in direction.
Most technical analysts will tell you that before the stock market can make any significant moves up, it normally establishes a stock market bottom and eventually retests it after some volatility and see-sawing activity. Right now, we’re on a cyclical upswing with some indication that the upswing is petering out. The market is showing a downward tendency and a predilection to perform that much awaited retest of the lows.

Adam puts forth his prediction that when all is said and done, the S & P may very well reach a “goal” (or touch a bottom) of 500. Gee, that’s lower than the preestablished low of 665. Since I’m not adept at shorting the markets, I’m not sure I’m going to participate in this downward run, but as a market spectator (I’m mainly an asset allocator and long term investor), I’m not feeling too thrilled by this prediction.


2. Charting techniques may give you some idea about where the market is headed.
Using the MarketClub tool in the video, Adam explains the past and expected movements of the stock market (based on the S & P index) by using the charting tool’s Fibonacci retracement feature. By plotting out the trends seen in the market’s movements, and by using some historical comparisons and the application of some well-known trading paradigms, we see that the market may be in the cusp of a fall.

3. Other technical indicators, like the MACD, show a downward bias.
I’m not going to pretend I know much about these other technical trading indicators, but it’s something I am trying to grasp as I attempt to learn more about technical analysis. As far as I understand it (please feel free to correct me), MACD is a “Moving Average Convergence/Divergence” indicator that sheds light on market momentum. So what is it telling us at this time? According to Adam, there’s a divergence here between the upward direction that the S & P has been taking and how the MACD is behaving; as I see it, when the “wave crosses over” and the MACD threatens to “roll over” or shift into negative territory, then this indicates market weakness, and selling pressure is in the offing.

4. The recent rally may be compared to previous short term bullish cycles.
Adam sees the current cycle or trading range for the S & P to be between 860 (the projected “high”) and 665 (as the projected “low”, although he mentions that it can go as low as 500). If the index drops below 780, the MarketClub charting indicators (called “Trading Triangles as patented by INO.com) are expected to shift and demonstrate a downward bias.

Now if you take a look at the month of December 2008, we saw a strong rally take shape. Of course all this is historical information, but chartists and technical analysts will tell you that there is some parallelism between the latest rally (in March/April 2009) and the December 2008 rally. The December 2008 rally lasted 30 days and things went downhill from there. And at the time of this writing, we’re around 28 days into this March/April 2009 rally. Does this imply that we’ll be repeating history, thereby also finding ourselves at the end of a 30 day rally? Let’s see how things unfold.

So what do you think… are you ready to profit from the shifts in the market winds? As for me, I’ll wait and see if technical analysis is something I can peruse at some point. But as a trading newbie, I’d prefer to be a market spectator for the time being.

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