Back to cash.

The SPX did make 809 today which is the bottom yesterday's opening gap. I will follow the sell rule I set yesterday. I'll move all accounts not managed by mechanical methods back to cash at today's close as long as I still have a profit at my fund cutoff time. Much of this capital is invested in Rydex Nova. So as of right now I'm looking at about a 3.5% one day gain. Of course, there's still 53 minutes left and a lot can happen in that time.

Nothing Bearish About Today's SPX Drop yet.

Today we opened with a big downside gap in the SPX due to news over the weekend concerning President Obama and GM/Chrysler. To me, a news-based gap and subsequent drop feels like a bit of mini-panic. Technically speaking, it's just a retest of the break above the R2 downtrend line, which is very common and nothing for the Bulls really be concerned about. The drop should find some support on R2 as old resistance often provides support but there's nothing all that comforting with "support" that's dropping as fast as R2. In other words, the SPX could drop day-after-day riding R2 lower and still be "supported". Additional support, should be provided by S3 at ~765, but its very short-term in nature. S3 is the level of an old top in the prior move down. Old tops often provide support for markets temporarily correcting down in an uptrend. S3 was also confirmed by supporting a drop on 3/20/09. And then there's the gap. That opening gap will tend to pull the SPX back up as long as traders don't completely give up on this rally. We're currently trading at 781 while the bottom of the gap is at 809 which is 3.6% overhead. Lastly, The SPX has an historical upward bias on the last day of each month and the first three trading days of the next month. For the March case, the SPX has shown a gain since 1942 over those four days 60% of the time (slighty more than normal) with the SPX appreciating at an annual rate +2.5 times normal. Since 2002, this bias has been strong with no losers, one break even, and the SPX appreciating at a 106% annual rate. Therefore, I will take this short-term trade with accounts not managed by mechanical accounts. As long as the SPX is between 765-790 at my Rydex cut-off time today, I'll go 100% long and sell at the first day that either today's opening gap partially or fully fills and I have a profit at the close, or at the close on the third trading day of april. However, I may change that sell plan and will make notification in this space.

The SPX broke out above R2

which I think will launch the SPX to R1 at about 880. That's 5.7% above where we closed today. If the SPX moves straight up to R1, I will miss the ride with my accounts not managed by mechanical methods. I'll assume that the downtrending channel bound by R1/S1 is going to control this market until it doesn't, which means to me that this is still a bear market rally. Therefore, I should err on the side of caution.

Look at the chart above and assume

that I chased the market and bought in at 850 tomorrow. Then imagine R1 turning the market down all the way to S1. Well, that entry at 850 would look awfully foolish in hindsight considering how close it is to R1 in an ongoing bear market. Technical analysis is easy in hindsight so I think considering how hindsight will appear if things don't go as planned is a useful exercise.

What I'd like to see is

the SPX run to 880 (R1) in the next week or so and then about a month of consolidation with the SPX bouncing between R1 and R2. To me that would indicate the sellers just cannot push the market back down to S1. And more points on R1 in either direction make R1 more significant and the channel's influence more likely. S1 is also strengthened simply because it's a parallel counterpart to the well-defined R1. I'd hope to get some directional clues during that consolidation period and position long depending on those clues.

Then I'd like to see the SPX

blast above R1 to about 950, then correct back to R1 in a retest and very obvious buying opportunity at about 850. If that were all to occur, I'd expect the SPX to run to over 1100, which is a move similar to the width of the R1/S1 channel. This move could still just be a bear market rally but as the market moves higher, long-term investor opinion shifts to bull market "buy the dips" mode. Then the old highs (~1550) will start pulling the market higher as opinion becomes that "surely" this new bull market will make all-time highs.

Of course scenarios rarely

play out exactly as for what you wish. So as of now, I'm simply willing to miss out on the move to 880 and buy the pull back which could drop as low as 800. If I don't get that, I'll just have to wait for a post R1 breakout retest of R1 up higher. If I don't get that, I'll face what I believe to be the toughest decision that exists in market timing. When do you give up on a pull back and chase the market?

I've faced it many times before,

which reminds me that I need to revisit the historical significance of when indexes move X% above their Y-day moving averages. I believe with today's close the Dow Jones Industrial Average will be about 9% above its 21-day moving average. This is rare historically and implies great strength. Maybe the type of strength worth chasing. But considering recent volatility, measures like this compared to historical norms may also be temporarily meaningless. Or maybe I can get something interesting to reveal if I normalize with the VIX. Just thinking out loud... I will do some testing, form an opinion, and report back.

Selling Oil Stocks.

We have sold an amount of both CHK and SD equal to the total amount we've invested. We've been accumulating SD near 5 and CHK under 15. And have now sold them at SD 7.31 and CHK 19.8. Therefore, all shares we now hold were accumulated at zero cost. We did not make the buy recommendations in this space but did to consulting clients and others so I'm making the notification here and will from this point forward follow oil shares in this space. This interface is not currently allowing me to upload graphs but both of these stocks are at well-defined resistance. I still think oil is going much higher eventually in an inflationary recovery but I think this move is too early and we'll be able to accumulate more at lower levels.. The cover of Apr09 Money Magazine contained the title "Buy Oil Stocks" or something similar and doing the opposite of that cover is probably a good idea. Whenever selling selling at resistance the risk is that the resistance will be overcome in a huge move but since I still own these shares at zero cost, I won't be too unhappy in that case either.

SPX Breakout ?

The SPX appears to have broken out today above R1. However, the day isn't over. If we get some profit taking into the close and the SPX closes down near R1, that will not look like a breakout and would instead appear to be a failed attempt at a breakout. So action into the close is going to be important.

Today opened with an upside gap off ST-S1. Gaps in the SPX "usually" fill. The market liked pre-open news and therefore lots of buyers cause the gap. I certainly prefer to see a breakout above R1 without a gap but we'll just have to watch. We won't chase this market and therefore won't be making any moves today.

SPX Testing Short-term Support.

Testing Short-Term Support.

The support line ST-S1 is now being tested. We saw a quick drop today after the downsloping ST-R1 was taken out. Now, it's logical to expect a bounce off ST-S1 back up to ST-R1. If that bounce does occur, ST-S1 becomes more important as its been a while since its been tested and a new successful test is another point on the line. I suspect the trading day will close between ST-R1 and ST-R1 which won't really tell me much of anything. However, if we are truly going much higher, ST-S1 should hold as its not unreasonably steep. If ST-S1 fails to hold either today or in the future, we should go quite a bit lower.

If we drop through ST-S1

and then down to 750, then we rally back up in an attempt to test ST-S1, we're in danger of forming a Head-and-shoulders Top (HST) which would then be confirmed with a drop below 750. The minimum downside implication of the HST would be down to around 700. This is a possible scenario for which I be watching closely.

This Rally Started with a Gap.

Historically, most gaps in the SPX fill. But the word, "most" is important. The gap down below 680 certainly doesn't have to fill but it's also difficult for it to leave the minds of traders. If we start getting some support failures, such as ST-S1, or especially the neckline of an HST, that gap will begin to pull the SPX down as more and more believe that it will fill and thus will put off taking long positions.

If the drop happens, it will be very interesting to

watch how the SPX reacts around the 700 level. If the SPX really wants to go higher, there may be so many buyers at and above the gap that it cannot actually fill. That would be a bullish clue.

As you can see, the downtrending resistance R1 has recently confirmed its importance by pushing the SPX down in the last couple days. I believe R1 is now proven to be the key technical operator right now. If R1 can be overcome we'd be off to the races on the upside to around 900. On the other hand, R1 still has a parallel counterpart (S1) that may come back into play if there is further downside in the near future.

If it isn't obvious

I'll say now that I'm in a 50/50 mode when it comes to which direction the next significant move will be and I'll be looking at clues to skew my opinion one way or the other. I sold accounts not managed by mechanical methods to cash at the recent high but I'm not at all confident that will end up being the right move.

Will exit to cash. Better safe than sorry...

I do not like the fact that the SPX did not correct down to ST-S1 and pause its advance for 3-5 days setting up a right shoulder in a Head-and-Shoulders Bottom (HSB) pattern. Instead it ran up to R1 and was pushed down promptly today. I think this market is overbought and I'm afraid it will not be able to overcome R1 without correcting. Therefore, I'll revert back to my original plan and exit to 100% cash. If R1 is eventually overcome, I'll be forced to reenter at higher levels. (ST-S1 and R1 are in charts below). I don't have time to set up new charts now as I have trades to make.

SP500 Should Correct down a bit then move Higher.

The SP500 (SPX) has reversed

after today's early rally. Many will consider this bearish and it should therefore be followed by more selling in the short-term. This reversal was almost guaranteed at some point considering that we opened gap up this morning. We've now filled that gap but additional selling from the bears inspired by today's reversal should take the SPX down to the ST-S1 line that we drew a few days ago. This line also corresponds exactly to the confirmed Head-and-Shoulders Bottom (HSB) neckline (NL). Now that we've filled the opening gap, I expect to move pretty much sideways into the close (which did happen before I uploaded this report). Then, we'll probably be down tomorrow (hopefully gap down) with the SPX finding good support on ST-S1/NL. This down move will be a retest of the HSB neckline (NL) which is very common. If we can rally off ST-S1/NL, the HSB should be considered more reliable in its implication of an eventual SPX move over 800.

Another reason today's reversal

was pretty obvious is due to Symmetry. V-Bottom recoveries are often symmetrical to the preceding drop. NL2-? would be the area we'd expect the SPX to pause to create a mirror image of the preceding drop. NL2-? is also another potential neckline of an HSB, labeled HSB2-?. We need a right shoulder to form which would be done perfectly as the SPX drops back down to ST-S1/NL as discussed above. In a perfect world that right shoulder would be 3-5 days of consolidation between NL2-? and ST-S1/NL to mirror the late Feb2009 period circled above. However, it's fine if the right shoulder is abbreviated as long as it visually appears to be a right shoulder. If the HSB2 is confirmed by the SPX breaking out above NL2-?, the upside implication would be 900. I'd expect the move to be resisted by R1 which would turn the SPX back down to retest NL2-?. Then the SPX would move up and bullishly break out above R1 followed by more symmetry based pauses at 840 and 880.

Interestingly, R1 has an parallel counterpart

which creates a downsloping channel. When the SPX dropped below the lower boundary of the channel on 3/2/09, I expected a drop downward of the width of the channel to 640. It didn't quite happen as the SPX only dropped about 75% of the channel width. If we break out above R1, we should again expect a rise of the channel width to around 925. However, if again we only get 75% or so of that, we're talking about a move up to 900 exactly as the HSB predicts. Round numbers like 900 will also often provide some resistance.

Looking much further out...

The intermediate trend is now dominated by a downsloping channel bound by S2 and R2. Whichever direction the SPX breaks out of this channel will probably determine the next intermediate-term move. If S2 were taken out, the SPX would probably drop to 450 as the Double Top implies.

However, another much better possible scenario also exists.

R2 appears to be around 885. I talked a lot above about a scenario that moves the SPX up to 900. But 885 should provide very tough resistance as there will be lots of sellers at R2 (unless we just blast right through it on a news-based rally). So, if R2 turns the SPX down, we again start to form the right shoulder of yet another HSB, which would be HSB3, with neckline drawn above HSB3-?. At that point symmetry would again suggest about a month of sideways movement and then a breakout above HSB3-? confirming HSB3.

The upside implication of HSB3

would be about SPX 1200. Again, before the SPX can make that level it's going to have to overcome R3. If R3 was overcome, I'd then expect a run at all-time highs for the SPX, basically an Obama Super-Bull.

Conclusion

My plan was to sell all capital not managed by mechanical methods at the first SPX close over 800 due to the SPX Double Top. Now, I'm not so sure and won't make that exact decision until I have too. Obviously, the further out you try predict something, the less accurate it's likely to be. I've laid out a bullish scenario that makes many assumptions. Technical scenarios like this always eventually fail at some point but in my opinion they are the key to making accurate predictions and sound discretionary trading decisions. The SPX is acting very well behaved lately. Our last few reports were very accurate both predicting SPX movements pretty much exactly and today's relative weakness in the Nasdaq 100 (NDX). How long that accuracy will continue is any one's guess. Having said that, every time the SPX makes one of the bullish milestones I mentioned above, the "End of the world, Double Top based SPX down to 450" scenario becomes less likely and hopefully will eventually fade into the history of false signals that make predicting market movements so difficult. I'll start by hoping ST-S1 supports the SPX as it corrects down a bit and we'll go from there.

Nasdaq 100 Relative Strength

Nasdaq 100 (NDX) Relative Strength

A friend and respected colleague reminded me yesterday that he essentially believes that the SP500 Double Top scenario is unlikely because of NDX strength. My response was, "I hope you're right", which I do. I'd very much prefer to be horribly wrong and simply adjust as I always do when I'm wrong. I too believed that the SP500 lows would hold. They were unconfirmed by pretty much every measure including NDX confirmation. I thought once the Stimulus bill passed, Congress and the President would essentially turn into economic cheerleaders and we'd be looking at a major market bottom.

The chart above is the NDX divided by the SP500 on a weekly basis (NDX/SPX).

This represents the strength of the NDX compared to the SP500. As you can see, the action since 2006 has been bound in a well-defined uptrending channel. We've touched the upper bound of this channel during the weeks ending, 1/17/06, 11/5/07, 8/18/08, and this week. All three previous points were followed by significant drops in the NDX. The 11/5/07 case was the very top of the last bull market. The 8/18/08 case was a smaller top just before the bear market really got going strong to the downside. After the 1/17/06 case, the NDX dropped 17.4% while the SP500 only dropped 4.6% which was more of a change in asset flow as opposed to a huge market sell-off.

So what does that mean for today?

As you can see in the chart, so far 2009 NDX/SPX has moved straight up to R1. A lot of traders and active asset allocators watch this chart. The 2009 move may be simply self-fulfilling. Ie. once NDX/SPX touched S1, that was a popular signal to move into NDX type assets expecting a move to R1. That opinion was so popular among big players that NDX/SPX simply moved straight up. If the 2009 NDX relative strength is simply a self-fulfilling pattern, it may be falsely indicating accumulation of higher risk assets (NDX) which is a common indication of a major market low.

Another exciting possibility

The straight up move in 2009 may truly indicate massive accumulation of NDX type assets due to other fundamental factors. If so this is very bullish for the overall market. In fact, that spectacular move into NDX type assets may have exaggerated the selling in the SP500 and Dow Jones Industrials. This may mean that the SP500 breakdown confirming the Double Top may have been somewhat due to unusual money flow similar to what occurred in the 2000 bear market. Back then, the spectacular flow of capital into bonds skewed all indications based on NYSE breadth because of the addition of so many NYSE listed bond funds and ETFs. Historically, NYSE breadth would reveal stock liquidation but because that liquidation was simply moving into other NYSE issues (bond funds and bond ETFs), it was hidden. This is an exciting possibility and obviously the case for which I'm hoping.

How to play it.

Personally, I'd move out of NDX based assets into market strength as I believe there will be at least some downward correction of NDX/SPX off R1. If the massive accumulation case actually exists, that correction should be short-lived and NDX/SPX should move sideways as the rest of the market gets into bull market mode. Or NDX/SPX could even continue to move higher taking out R1 as bullish investors accelerate buying of battered tech stocks. This will be an important clue to me as I consider whether the short-term market rally I expect appears to be a dead-cat bounce in a bear market, or the start of an Obama Bull Market.

A Reversal Today is OK but this Rally needs legs.

Extreme Pessimism to Optimism

Yesterday's rally was rightfully welcome by all. Everybody has an opinion of why it occurred and here's mine: An extremely oversold market waiting for some good news which it got in the CITI profits, talk of relaxing mark-to-market accounting, and changing short-sale rules. More about this below.

Expected SP500 Action

The SP500 has done almost exactly what I predicted. We've now been turned down by the GR2 resistance line from selling at the gap level. As I write, the SP500 has now dropped further to around 720 so I think it's safe to assume we have a Head-and-Shoulders Bottom (HSB) Neckline (NL) in place. The old gap resistance which was overcome (GR1) should now act as support. Off explosive moves from lows, the first uptrend line of support should be drawn ignoring the low as I've draw ST-S1 above. The two lines of short-term support we're looking at, GR1 and ST-S1 meet at a target (T) as I've indicated above. I believe that is where we'll close out the day if we don't get there before then. I want to see the the SP500 rally from there and overtake NL to confirm the HSB that will launch us up to 800. Honestly, I'd prefer NL to be less upsloping as breaking above this type of resistance is much more reliable if it is horizontal. Upsloping resistance breaks are more often false. Lastly, if we get major liquidation and ST-S1 fails, the SP500 should drop back down to ST-S2. This won't take the HSB scenario off the table but it does change the game a bit. We have an unfilled gap at yesterday's open which will tend to pull the SP500 down.

If I worked for President Obama,

I'd time an announcement supporting the proposed bank accounting and shorting rules 30 minutes before the close with the SP500 inside the T circle, or at the point when the SP500 drops five points below ST-S1. We'd be off to the races to create a couple trillion in wealth for American citizens.

I'm no Banking accountant but,

It does not make sense to me to force banks to use "fair value" accounting in abnormal illiquid markets. I agree we need a reasonable representation of the health of our banking system but a piece of real estate backing a mortgage is a hard asset. It has value even if there are currently no buyers due to panic, inability to appraise value, etc. If the house next door panic sells at a $100k discount because the seller desperately needs money to pay off a loan shark, it does not reduce the value of your home by $100k. And every home on the market is not worthless simply because due to illiquidity buyers and sellers cannot meet at a price. Even with today's uncertainty, for every home on the market, there is a buyer in the world at some price. When you buy a stock, you instantly know exactly what you're getting, what it costs immediately and in the long-term, its exact price history, how many shares are for sale and at what price. Buyers and sellers are lined up on each side of the spread and when they meet, a sale is made. With some random real estate property at auction in say Cleveland, none of that information is available to an investor in Breckenridge. That lack of information creates illiquidity. Illiquidity creates an inability to appraise true value. That creates volatility in bank balance sheets using Fair Value accounting, which finally results in Fed policy, bailouts, political arguments, etc.

Short selling is healthy and necessary but,

America's companies alter their plans when their value is driven down. These companies employ our citizens. The value of our companies have great impact on our spending. Very few feel much like buying a new car when they've lost half their life savings (Reverse wealth effect). The value of these companies will have great impact on the ability of our citizens to retire helped by their 401k investments. Reasonable limits on short-selling shares of our companies such as bringing back the uptick rule and elimination of naked shorting are needed to lower the volatility of the valuations of our companies. High volatility is only good for traders. Low volatility growth is good for the majority, which are investors.

I'm certainly not the first to support these measures but I do think these steps are basically free methods of helping us get out of this situation.

(Forgive me as I still can't figure out line breaks and the spell checker on this interface.)

Here Comes the Rally

Oversold SP500 is Overdue for a Signficant Rally.

This appears to be the start of the rally back up to 800 retesting the Oct2002 low between the 2001 and 2007 tops. When that was taken out, a bearish Double Top in the SP500 was confirmed calling for an eventual drop to SP500 450.

Individuals are too Bearish.

Last week's survey of Association of Individual Investors bearishness was 70.3% which is the highest level in my database going back to 1987. When that many individual investors are bearish, they are probably wrong in the short-term.

The Short-term Scenario I Expect.

If this really is the start of something significant, we should see some resistance at each unfilled gap exactly as we're seeing now in the chart above as sellers liquidate at the low sides of each gap (GR1 and GR2 above). Once the sellers are overtaken, the SP500 should move higher to near GR2 which could happen today. I've drawn a sample NL? resistance line that intersects GR2. When/if the SP500 turns lower resisted by NL?/GR2, we'll have setup a potential Head-and-shoulders bottom (HSB) pattern. We'd like to see the SP500 turn lower off the NL?/GR2 line back down to about GR1. After that, a new rally over NL? will confirm the HSB. The implications of a confirmed HSB after confirmation is the height of the pattern which should end up being about 60 SP500 points taking the SP500 to around 800 as we expect.

Our Plan.

As I mentioned last time, we'll liquidate the rest of our long positions not managed by mechanical methods at the next close over 800. We are strongly considering managing much of that capital with our mechanical BBS short system and will let you know if we decide upon that plan.

Finally.

I believe President Obama he is doing what he believes to be best for America in the long-term. Having said that, I believe our main economic problem is deteriorating asset values and policy to solve that issue should be the main priority. In my opinion, the reverse Wealth-effect will not be overcome by demand-side federal spending, which I'll be writing more about later. We need drastic policy to stabilize, or at least make it possible to appraise valuations, in our real-estate market. If that occured, along with some bank accounting changes, banks would stabilize. The point when the market is convinced that banks will become stable in the near future is when stocks will signficantly recover. Then we'll be on our way out of this mess. Unfortunately, I'm just not seeing it and therefore I believe that the economic fundamentals concur with the technicals, which implies another significant leg down in the market.

S&P 500 Double Top

The above chart is the S&P 500 Index (SPX) on a monthly basis from 1950 to present. (click on chart for a bigger version). S&P500 Index (SPX) Double Top

The two recent major tops obvious in the chart above occurred on 03/24/00 at 1527.46 and 10/10/07 at 1562.47. A Double Top as defined by Edwards and Magee in Technical Analysis of Stock Trends (1948) requires that the two tops "appear at the same level" which they obviously do. There must be a down move between the two tops significant enough so that the two tops cannot be considered part of the same overall "uptrend". Considering that the tops are over 7.5 years apart these tops easily meet that requirement. Lastly, in order for the Double Top pattern to be considered confirmed, the SPX must "drop through the bottom level of the valley", which is S2 in the chart above. There are many ways to answer when and if this occurs. The definition I'm using gave the SPX plenty of opportunity to reverse at S2 and move higher. Because the chart is a monthly chart, I required that a monthly close be obviously lower than the lowest intraday price of the SPX at the valley low point. That valley low point was on 10/10/02 at 768.63. The SPX closed the month of February on 02/27/09 at 735.09 which is clearly below the valley's intraday low. Therefore in my opinion, the Double Top pattern is clearly confirmed.

About the Double Top, Edwards and Magee state,

"...it is usually a signal of Major importance. Fully confirmed Double Tops seldom appear at turns in the Intermediate trend; they are characteristically a Primary reversal phenomenon. Hence, when you are sure you have one, do not scorn it. Even though prices may have already receded 20%, the chances are they have very much farther to go before they reach a bottom."

So what are the implications of the confirmed Double Top pattern?

The rule of thumb is to expect a move equal to the height of the pattern projected downward from the valley low. That implies a drop in the SPX to around 450.

The Long-Term uptrend in the SPX

As you can see in the chart above, the uptrend line S1 is drawn across the two major lows of my lifetime: 10/03/74 at 62.28 and 08/12/82 at 102.42. Just off the chart is the 06/13/49 low at 13.55 which is also very close to S1. The S1 line rises at a 6.5% annual rate. This is the historical appreciation rate of the stock market (not including dividends) over the period starting at the important low in 1949 after a few years of post-World War II sideways movement, and ending at the 1982 low which was the start of the Reagan Revolution and the dawn of the Personal Computer.

Extending S1 to the present, it is around SPX 450 which perfectly corresponds with the downside implcation of the SPX Double Top. One of the many ways the investment industry misleads people is by comparing performance at either random points that work well for marketing or by comparing buying at bottom and selling at tops. The reality is that stock market investor evaluating true risk/reward should compare apples and apples which in this case would be bottoms and bottoms. If we are looking for where a very important long term bottom should occur, it makes sense that it would occur on the 6.5% annual return line (S1) on which three major bottoms since 1949 also occurred.

The Long-Term Conclusion

After 17 years of writing to my clients, normally, this is the place where I'd say, "a drop to SPX 450 is likely". But I cannot get myself to say it. The implications of such a move are devastating for our country and for the world. It is a Great Depression type scenario.

I first wrote about this possiblity far before the second top was in place. Now, I've avoided writing this analysis. I've hoped and prayed that the market would turn and not confirm this pattern. As an entrepreneur, investor, and market timer who'd much rather be professionally wrong than see the majority fail, I'm angry. This market desperately needed encouraging words and wise action from our government. Instead, we got daily speeches from our leaders about how bad things were, that they'd surely get much worse, and how it would take years to recover. Even though some economists may believe that, others know that economies can turn around quickly, and economic predictions have less than stellar track records all of which are impossible to analyze. Have you ever seen an economist make his historical track record of failures and successes public information before presenting a market altering economic opinion?

The Last Straw

I was optimisitc. I really believed that once the Stimulus Package passed, the administration would turn vocally positive hoping to turn the markets before the S2 support failed. But instead, they want much more. Exactly at the critical point of testing the S2 support, we got the proposed federal budget that, in my opinion, is harmful to investors, markets, entreprenuers, business, and anyone who has succeeded financially. Heck, right at the S2 test we were entering the late February/Eary March period which has a huge bullish bias. It would have been easy for the administration to turn the market up at the S2 support enough to get traders short-term bullish and therefore move the market significantly higher.

At least that would have bought us some time.

However, it's my opinion that our President believes that the health of the stock market is less important than his agenda of Universal Health Care, Cap-and-Trade, etc. It's my opinion that our President believes that downward moves in the SPX are merely short term and only hurt the rich, and that his long-term policy goals are far more important. If that is truly the case I think he is dead wrong and even though the drop through the S2 support can be considered a short-term move, it's a very important one that could turn a recession into something far worse.

So finally I will say this...

No pattern, analysis, system, or prediction is more than about 75% accurate at best. We've had many false breaks to the upside lately and hopefully this is just a historical fake-out for us market technicians as well. The future is not set in stone and for the good of the majority I hope the scenario I've presented above is miserably misguided and wrong.

The SPX is Overdue for a Short-term Rally

Downside Gaps, which are days when the open is below the previous day's low usually indicate a market that has become too negative. When a market gets too negative it usually will reverse and therefore, gaps usually fill. (Ie. The SPX will usually move back up to the point where the gap opened.) We opened this morning (03/02/09) with a big gap and we still have two unfilled gaps overhead. The highest opened 0n 02/17/09 at SPX 825.21 as the SPX fell below well defined short-term support S3 just over 800. The SPX has also now fallen 11 of the last 12 days. Markets do not move straight down and this market is far overdue for a rally.

Therefore... The SPX should move up to retest S3, attempt to fill the gap at 825, but be pushed back down by the downtrend line that is forming (R1). I would not be surprised to see the SPX move up to almost 825 in a huge early rally that ends up being a key reversal with the close right on S3 at 800. (A Key Reversal is a day that moves substantially higher early in the trading day and then collapses later closing right around even or even down slightly.)

Conclusion...

As most know, our capital is mostly managed by the mechanical stock/gold market timing systems and strategies we've developed in ULTRA 10, and which have performed very well. However, we do manage some capital using straight technical analysis, which is the analysis of price charts. For that capital, we entered this market long around SPX 850 hoping for a long-term buy at what we'd thought was support that would hold. We've now given up and are looking to exit to 100% cash. It almost never pays to sell out in a downside panic so we'll be a little patient. As I said, I expect this market to rally in the short term and make a run at filling the gap at 825. Therefore, we'll sell all our non-mechanically managed accounts to 100% cash at the next close over 800.

And Lastly...

Most of the people who've read my writing over the last two decades are highly sophisticated investors, money managers, and traders. Since this is the first time my analysis will be available to the public, I want to make an important statement. Do not use my words to panic out of the market. There are tax issues that probably concern you and even if the market falls much farther, you will still need to re-enter down the road and that will be a difficult decision to make. Also, there's at least a 25% chance that I am dead wrong. I'm perfectly willing to be wrong and forced to re-enter at higher levels. The worst thing a long-term investor can do is panic sell and then miss the recovery. Hoard cash and get ready for the buying opportunity of a lifetime down the road.

Good Luck,

Steve Hunter, ULTRA Financial Systems LLC

http://www.ultrafs.com/