OK, I got a new toy today so I’m going to put up some charts!
Rather than my usual spreadsheets, I thought a visual representation of what I think is going on would be appropriate. So far this week, we have failed to break my levels, which were predicted by our own 5% rule way back in July. I don’t have a drawing tool for the 5% rule but I’ll try to give you an idea of what I see when I look at a chart, now that I can capture them for you.
First of all, let’s look at the S&P, which the analysts are ga-ga over as they make a 50% retracement of the March dive:
Notice the 50% mark is right about our 1,127 watch zone but we didn’t get 1,127 from that spot, we calculated 1,127 as it was a 30% move off the real floor of 867, which is our 5% rule drop. The 5% rule sensibly tells us to throw out spikes and, while it’s hard to think of a 3-month, 200-point drop as a spike, in the grand scheme of things it still is. Here’s how the same Fibonacci series looks if we take 867 as a bottom, rather than 666:
Not quite as impressive a recovery is it? Do you see how the adjusted chart makes far more sense on the way down – with support at the 61.8% line, then at the 50% line and then clearly at 0. The big difference is, in my view of the action, it has been an easy slog to make the effectively dead-cat bounce back to 38.2%. This recent action proves nothing as we have yet to test 1,135, which should provide heavier resistance. It’s going to be a long time before we do a "life cross" (where the 50 wma moves above the 200 wma) so that 1,220 mark is going to weigh very heavily in the future as well, probably all the way into August before the S&P is ready to make a real move up (assuming we don’t fall down in between).
Running the same series on the Dow, we get this: