Thursday, January 21, 2010

50% Retracement of the Bear Market

After thinking about it for a bit, it dawned on me what the Bloomberg journalist was trying to say in his poorly worded article earlier. He was pointing out that today the S&P 500 reversed back below its 50% retracement level of the 2007-2009 bear market (precisely 1121.44). Actually, this is a good point, a bearish development and I'm glad it was brought to my attention, albeit after a little work on my part. He was *not* talking about the 50% retrace of the rally from the March 2009 lows as was implied.

If you look at the chart above you can see precisely where the level of interest (50% bear retrace) is for the S&P 500. On the one hand its just a technical level that has value merely because traders think it does and you can easily see that this level has represented resistance recently (note daily chart below). On the other hand, you can image that this is a psychologically important level because it is roughly where 50% of bear market investors break even. Those investors might be happy to get out with all of their money back. One perspective some technicians might take is that the 50% retracement is an appropriate correction to the initial bear market move. Note that Elliot wave folks are going nuts over this and have turned extremely bearish as of late and they aren't the only ones. Often you'll see that after a stock makes some big move, it will "retrace" 50% of that move to effectively digest the price action. The idea being that after the correction is over the longer term trend resumes. Its far too early to say if this is the case here, but I will be keeping a close eye on this developing pattern, I'm skeptical that the S&P 500 will give up its rapidly rising 50 dma so easily.

Interestingly, this level (1121.44) also represents the closing price of 2009 and the opening price of 2010, roughly. The Bloomberg author could have also noted the S&P 500 went negative for the year by closing below this level.

No comments: