So to summarize we formed an ominous double top formation over a
period of about 7 years. Since then in 2008 the market has started moving
down again.
These types of double top patterns over long periods of time after
a parabolic rise are very powerful chart patterns
that signal much lower prices ahead.
And when I say much lower, I mean much lower. It is not pleasant to
say how this type of pattern often plays out, but here it is. The
first real bounce would be expected down in the 800 area where the last
correction ended. And in the latter part of 2008 that is exactly what has
happened.
But I would not expect it to hold there for long. After that the next
real hold area would be in the 450 area, but there is no guarantee it will even
stop there. Even if it does we're probably in a depression or at least a painful
recession.
Keep in mind this is an index of 500 stocks and some of them have earnings
for now so I would not expect it to be as severe as some of the dot com stocks
in 2000 that were taken to the moon on simply an expectation of earnings before
the bubble burst. For example, YHOO topped out at around 200 and before it
was over the stock was trading below 10 a couple of years later.
However, keep one thing in mind about earnings. If we go into a very
serious recession or depression in the economy many of these companies will have
negative earnings... in other words they will be losing money.
Bottom Line: The double top formation will not be
broken unless the S&P 500 goes back above the old high of 1,561. This
looks extremely unlikely in the next 12 months. I think the more
likely scenario is that the market moves lower and at some point in 2009 the
S&P 500 index dips below 500.
The Federal Reserve and Congress are throwing trillions at the
economy in hopes that we will avert a serious recession or depression. At
this point I think the odds still favor a serious market and economic downturn
despite their heroic efforts to stop this ugly scenario from
unfolding.
Only time will tell whether they will be successful, but I have my doubts
unless and until I see encouraging signs in the economy. Until then the
stock market is on shaky ground and subject to sudden and violent down days that
will wipe out all those trying to pick the bottom in this market
at this time before the final bottom is reached at much lower levels.
