Markets Lunge for 50% Monthly Fib Retracement

Jul 15, 2008: 9:41 AM CST

If you’ve been caught in the day-to-day activities of your trading, take a moment now and look at the larger picture of the primary (or broader) trend of the major US Stock Market Indexes – the S&P 500 chart looks eerily similar to the beginning of the 2000-2001 decline.  Let’s look quickly at the Fibonacci retracements of the 2003 – 2007 bull market.

The S&P 500 monthly chart:

Price tested the 38% retracement (1,266) two times in 2008, both at the climactic lows so far in January and March, which have now clearly and convincingly been broken.

The market is now poised to test its 50% retracement of the bull move, which occurs near 1,171.  This is a startling and – for some – unexpected development given the rapidness of the current index plunge.

Look back in time to the S&P Index through 2000 and you see an eerily similar pattern – price formed a semi-double top, broke the rising 20 period moving average, fell through and tested (and found support) at the rising 50 period average, retested the falling 20 period average, and then rolled over, confirming the inevitable.  Price then found resistance at the 50 period average before making a ‘triple bottom’ and beginning the prior bull market, which has now officially and undeniably ended.

The Dow Jones shows a similar pattern, though it has achieved higher prices than its 2000 peak:

The Dow is currently less than 200 points away from testing its monthly 50% Fibonacci retracement.  Price had a stronger rally in 2006 and 2007 than the S&P, so the current peak is higher than the 11,500 peak in 2000, but still the index has (almost) retraced half of the bull market phase from 2003-2007.

Two quick notes:

The structure has clearly taken a turn for the worse, and we are in a confirmed bear market.

Second, we could expect the 50% retracement to provide a counter-rally, temporary bounce back up possibly to test the 50 period monthly moving averages or slightly beyond.  Now might not be the appropriate time to become super bearish, but long term, one has an extremely difficult time being bullish.

4 Comments

4 Responses to “Markets Lunge for 50% Monthly Fib Retracement”

  1. David Says:

    Corey,

    Love this analysis. One of the admins has been running an analyis along these lines for the last few months along these lines http://www.freetradingvideos.com/forum/forum_posts.asp?TID=658&PN=13

  2. Don Da Mon Says:

    I appreciate the longer term view that was presented. Can it be taken a step further? For example, could an analysis be made going back many decades (1900? Pre great depression) showing any divergences within the period and a conclusion for say the next decade?

  3. Moira Says:

    Very excellent analysis and confirmation of my own ideas. Glad to see this commentary. Gives me a feeling of comfort to see that I’ve prepared for this possible scenario by lightening up on my long positions and buying a short fund.

  4. Don Da Mon Says:

    Looking at the S&P chart, is there any analysis/strategy that takes into consideration the slope to a peak and comparing it to the slope from the peak? The 2000 peak had a rise and fall at the same slopes. The 2007 peak was reached with a more gradual slope. Would then the decline also be a more gradual slope?