Tragedy or a Bounce

Monday, June 30, 2008 | Home | Andy Mayo

On the last day of June, markets are poised to move much lower or bounce. 

As this chart shows, the S&P 500 is at a critical point -- a 38% retracement of gains from the 2003-2007 bull market.  The next stop, a 50% retracement, is another 100 points down.

 

A bounce from this point, on the other hand, just might give us a double bottom pattern and that would be bullish.  We'll need to see a break-out in New Highs for that to happen (lower chart).

Of course the financial sector exchange traded fund XLF has crashed through its 62% retracement headed for a 100% give-back of gains from 2003.  It is only 0.74 percentage points away from that mark.  A downturn from that point will be tragic.



Financials have been trash before -- for example during the dot-com boom during 1999 and early 2000.
But taking the long view we can see -- the heavy red line connecting the two red arrows -- just how far Nasdaq had to fall before washing out the excess of its boom. 



We can also see that technology, as represented by the Nasdaq Composite Index, is right on its long-term trendline (the black line under the green line) as the Financials (the dotted blue line)  have plunged.  Will Technology lead us out of our current wilderness as Financials led us out of the last Bear Market?  The Nasdaq will have to hold that trendline first.

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