September 28, 2011: Looking For Direction

September 28, 2011

It is my opinion that in August, we began another cyclical bear market (bad) within an overall Secular Bear Mega-trend that began in 2000.This blog will attempt to answer why, on Monday, September 26, 2011, we called a potential counter-trend rally for equities…which so far has played out. We believe that this rally has the potential to lull investors into a sense of complacency. Visit my Twitter page for more insight: http://twitter.com/#!/mattfalvey

Technical Analysis is not a crystal ball. We like to think of it as a wind sock that helps us to determine the longer term direction of drift for the markets. Simply put, it allows us to play probabilities and answer the question, “What are the odds of _____ scenario playing out?” So having said that, lets look at some charts that show inter-market relationships, which in turn allow us to see possible counter-trend rallies or corrections.

On Friday, Sept 23, 2011, the S&P 500 closed at the bottom of it’s current trading range:

At the same time, the VIX or Volatility Index, which typically moves opposite to the S&P 500, closed at the top of it’s trading range:

BELOW ARE UPDATES TO WHERE WE CURRENTLY ARE WITHIN EACH PATTERN. FOLLOWING THE CHARTS, I WILL POST “GUESSTIMATES” ON WHAT TO LOOK FOR NEXT.

S&P 500 as of September 27, 2011:

VIX as of September 27, 2011:

So the questions investors have to ask are, “What are the probabilities of this pattern continuing in the short term?” and “What can we potentially look for in the longer-term when this pattern ends?”

My blog post entitled “A Time to Hunker Down?” was posted on September 27, 2011. Bottom line, we think conditions favor more movement to the downside.

The chart below attempts to look at some potential scenarios. It is a very busy chart, but I believe the Red Box represents most likely resistance zone for any short and intermediate term rally and the Yellow Box represents the zone for the first potential support level should the S&P 500 break to the downside. What do you think? Are you giving the bears (falling stock prices) or the bulls (rising stock prices) the benefit of the doubt? See chart below:

Best returns,

Matt Falvey, Chief Investment Officer, Rich Investments, Inc.