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Amateur Investors Weekend Stock Market Analysis (9/6/08)

http://www.amateur-investor.net/Weekend_Market_Analysis_Sep_6_08.htm

The market got hit hard this week and as I mentioned in last weekend's report September has historically been the worst performing month for the market going back to 1900. Currently it looks like we are seeing a similar pattern develop like occurred in the Fall and Winter of 2007 when the Volatility Index (VIX) rose just above the 30 level (point A) which was followed by an 8% rally in the S&P 500 (points B to C) as the VIX dropped back to around the 18 level (point D). This was then followed by another significant rise in the VIX as it rose well above the 30 level (points D to E) as the S&P 500 went through a substantial drop over a 6 week period (pints C to F) in which it lost 17% of its value.

Meanwhile during the past few months the VIX peaked in mid July just above the 30 level (point G) which was followed by a 9% rally in the S&P 500 (points H to I) as the VIX dropped back to just above the 18 level (points G to J). Furthermore during the past two weeks the VIX has begun to move higher again and the question is will we now see a repeat of what happened last Fall and Winter when the S&P 500 underwent a substantial sell off over a 6 week period.



Overall the longer term pattern in the S&P 500 looks very similar to that of the 2000-2002 time period in which it made a series of lower Lows (L) and lower Highs (H) until a bottom occurred in the October of 2002. So far it appears we are seeing the same type of pattern developing.



In the weeks ahead the key support level to watch in the S&P 500 is at 1200 (point K). If the 1200 level is taken out then the next level of support would either be at the 50% Retracement Level near 1170 (point L) or at the 61.8% Retracement Level around 1075 (point M). Both of these Retracement Levels were calculated from the October 2002 low to the October 2007 high.



As far as the Dow the key support level to watch in the weeks ahead is at its 50% Retracement Level near 10700 (point N) which was calculated from the October 2002 low to the October 2007 high. If the 10700 level is taken out then the next level of support will be at its 61.8% Retracement Level near 9750 (point O). Also as you can see below the Dow has been making a series of lower Lows (L) and lower Highs (H) just like we saw from 2000 through 2002.



Meanwhile as for the Nasdaq the key support level to watch over the next few weeks remains around the 2200 level which coincides with its 38.2% Retracement Level calculated from the October 2002 low to the October 2007 high. During the past 8 months the Nasdaq has been holding support near this level (points P). If the Nasdaq were to take out the 2200 level then its next level of support would be at its 50% Retracement Level near 2000 (point Q).



As far as the Nasdaq 100 so far it has held support near 1670 which coincides with its 38.2% Retracement Level (point R) calculated from the October 2002 low to the October 2007 high so that will be a key area to watch in the weeks ahead. If the Nasdaq 100 were to take out the 1670 level then its next area of supporrt would be at its 50% Retracement Level near 1500 (point S).



Overall I expect to see a lot of volatility the rest of the year with large moves occurring in both directions although the longer term trend remains to the downside.