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Amateur Investors Weekend Stock Market Analysis 9/8/07

http://www.amateur-investor.net/Weekend_Market_Analysis_Sep_8_07.htm

The most likely scenario in the weeks ahead is for the major averages to retest their August 16th lows. Meanwhile if the August 16th lows are retested the question is will this lead to the development of a bullish Double Bottom pattern like occurred in the Fall of 1998. Back in 1998 it took roughly 7 weeks for the S&P 500 to make it's first bottom in early September after peaking in mid July (point A) which was then followed by a choppy 15 day rally that peaked in late September (point B). This was then followed by a retest of the initial bottom in early October which only took 11 trading days and led to the formation of a bullish Double Bottom pattern. This was then followed by strong rally in which the S&P 500 rose back to its previous July high and gained around 25%.



The current chart of the S&P 500 shows a rather similar pattern developing as it took 5 weeks for the first bottom to occur near 1370 which was then followed by a choppy 12 day rally.



Meanwhile the 1370 level in the S&P 500 coincides with with its longer term 23.6% Retracement Level calculated from the October 2002 low to the July high. Also notice that the S&P 500's 25 Month EMA (blue line) comes into play right near the 1370 level as well and has acted as a support area in the past (points C).



One positive development for the market is that the professional investment advisors are becoming more bearish as the 3 week average of bearish advisors has now risen back above the 35% level. Since the mid 1990's each time the 3 week average of bearish advisors has exceeded 35% (points D) this has been followed by an eventual bottom within a few weeks followed by a strong rally (points E to F). Thus if the S&P 500 does retest its August 16th low near 1370 this could lead to a significant bottom followed by a strong rally if history repeats itself.