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Amateur Investors Weekend Market Analysis (8/29/09)

http://www.amateur-investor.net/Weekend_Market_Analysis_Aug_29_09.htm

The table below shows the historical monthly returns of the Dow going back to 1896. As you can see the best performing months for the Dow have been in April, July, August and December. Meanwhile notice the worst performing months for the Dow have been in February, May and September with September clearing being the worst month by a wide margin.

Dow Monthly Performance since 1896 
      Positive  Negative % 	% 	 Average 
      Returns   Returns Positive Negative Return 
 Jan 	73 	40 	64.6 	35.4 	0.97 
 Feb 	57 	56 	50.4 	49.6   -0.29 
 Mar 	68 	45 	60.2 	39.8 	0.77 
 April 	63 	50 	63.0 	37.0 	1.22 
 May 	58 	55 	51.3 	48.7 	0.02 
 June 	56 	58 	49.2 	50.8 	0.25 
 July 	70 	44 	61.4 	38.6 	1.32 
 Aug 	73 	39 	65.2 	34.8 	1.25 
 Sep 	46 	66 	41.0 	59.0   -1.18 
 Oct 	64 	58 	57.1 	42.9 	0.19 
 Nov 	67 	45 	59.8 	40.2 	0.90 
 Dec 	79 	33 	70.5 	29.5 	1.38

With the S&P 500 gaining 56% since the March low and being up 6 months in a row the odds would favor a pullback in September as this has historically been a weak period for the market. As I talked about last week I mentioned there are two potential wave patterns as one is bearish and the other bullish thrpugh the end of the year.

The bearish pattern is that the current rally from the March low is the final Wave C of a larger ABC corrective rally which is nearing completion. If that is the case then the S&P 500 may peak somewhere in the 1048 to 1053 range. 1048 is calculated by taking 61.8% of Wave A's length (289) and adding that number (179) to the bottom of Wave B (869). Meanwhile 1053 is the 50% Retrace calculated from the peak of Wave 2 to the bottom of Wave 5.



In addition also notice the longer term upward trend line (black line) connecting the low made in the early 1990's recession to the low made in the previous recession in October of 2002 is around the 1050 level as well. So there does appear to be a significant resistance area in the 1048 to 1053 range. If we are nearing completion of an ABC corrective rally the key level to watch in the Fall would be the Wave B low of 869 (blue line in above chart). If that level were to be taken out then that would be a bearish development for the longer term.



As for the bullish case the latest rally from the March low could just be minor Wave "a" of C which will peak in the 1048 to 1053 range and then be followed by a pullback for minor Wave "b" of C. Once the pullback ends then minor Wave "c" of C will occur with a potential target price in the 1121 to 1158 range. 1121 is the 50% Retrace from the October 2007 high to the March 2009 low and is also near the longer term downward trend line (black line). Meanwhile 1158 would be if the length of Wave C equals the length of Wave A which was 289 points. In order for this bullish scenario to play out the S&P 500 should hold support around 956 which was the peak for Wave A.



Meanwhile keep a close eye on the China's market as it has pulled back to a key Retracement Level of 38.2% after rising 109% in 9 months. If it were to drop below the 38.2% Retrace then look for a deeper correction back to the 50% Retrace or 61.8% Retrace. Keep in mind if China's market continues to correct this may eventually spread to other markets in the world before much longer.



Finally when looking for stocks to invest in focus on those that are breaking out of a favorable chart pattern such as the Cup and Handle. SCLN is a stock we focused on back in June as it had developed a small 3 week Handle (H) after forming a Cup. Since breaking out it has doubled in price over the past few months.



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