If the market can't rally on Friday, then I suspect the talk of the S&P 500 triangle formation will disappear -- and, instead, we'll see an increasing number of comparisons with 2008. I wrote about this comparison about three weeks ago, well before the S&P was near the 200-day moving average line, but since I've seen it arise all over the place.
As a refresher, let's revisit the chart from 2008. From the fall of 2007 through early spring of 2008, a head-and-shoulders top formed in the S&P. When Bear Stearns began to falter in late February and early March, the index plunged, making a low around 1250 in mid-March. From there the S&P rallied about 15% over the course of six to eight weeks, until it kissed the 200-day moving average line. That period is noted in the red box, labeled "A," on the chart below.
As you can see, the S&P then plunged down through the 50-day moving average line, and onward into the fall of 2008 and that market debacle. Now, in the early part of 2011, a similar head-and-shoulders top developed -- and August saw a breakdown from that formation. The early-October low, meanwhile, looks similar to the Bear Stearns low. This time, though, the rally lasted about three weeks, and brought the S&P about 20% higher. So the action looks similar on the surface, but there are some differences between these two periods.
Let me note that, while I believe history rhymes, I do not believe it repeats exactly. I also believe it is very rare for a pattern so fresh in our minds to repeat so readily. In this case, from my viewpoint the main difference is this: In 2008, the market had not experienced such a financial meltdown for a generation, so many folks were long and highly leveraged going into it. I do not believe to be the case now.
One of the reasons I say this relates to margin debt. For this data -- which are current as of this past September -- margin debt for the spring of this year came in about where it was in the fall of 2008 (not shown on the chart).
But I do suspect that, if the market falls further, this 2008 chart of the S&P will take over the discussion, and that the chart will be shown everywhere.
Back to the current market, the S&P has fallen into a minor support area -- the 50-day moving average sits right below current levels. After falling 4% in essentially a day and a half, it would make sense for us to see some sort of a bounce Friday.
I realize the S&P broke down out of the triangle, and that is negative. I believe it's now left resistance overhead. For me, though -- since I pay more attention to the indicators than the chart pattern -- I would note that stocks are still nowhere close to oversold on an intermediate-term basis. The oscillator isn't even oversold, though it is now back under the zero line. For it to read as oversold, it would have to drop string of negative numbers, and I simply do not see that yet.
Also concerning to me is that the number of stocks making new lows expanded Thursday. Early in the day it looked as though they would contract but, as the day wore on, the opposite occurred. There are only 61 new lows on the NYSE, so it's not as though the number is dire -- but it's the direction of the reading, rather than the absolute number. A week ago, when the S&P last came down into this area, there were only 39 new lows.
To sum up, I'm looking for some sort of bounce, but I believe the resistance overhead will now become a problem.
