As expected it was another very volatile week and look for more volatility in the coming weeks. A longer term chart of the Volatility Index (VXO) going all the way back to the mid 1980's shows there have been periods of low and high volatility. There was high volatility in the mid to late 1980's which included the October 1987 crash in which the VXO rose to around 100 (point A). This was followed by a period of lower volatility from the early 1990's until the late 1990's in which the S&P 500 basically was in a steady up trend (points B to C). However beginning in 1998 the volatility began to increase again which continued through 2002 which was followed by an eventual top in the S&P 500 and a Bear Market (points D to E). Meanwhile beginning in 2003 the volatility began to decrease and remained rather low through the middle part of 2007 which was accompanied by a Bull Market environment (points E to F). However since the middle part of 2007 the volatility has been increasing again as the market has switched to a Bearish environment (points F to G). Thus based on historical trends it appears this increase in volatility will be around for awhile.
As far as the major averages they have been very erratic as it appears investors are keying on the bailout plan and what the final package will look like. I expect another extremely volatile week next week and don't be surprised if we see one of those Buy on the Rumor...Sell on the News scenarios develop once Congress approves the plan.
If plan gets approved early next week I expect the Dow will rally up to either its 61.8% Retracement Level (calculated from the August 11th high to the September 18th low) near 11340 which is also very close to its 50 Day EMA (green line) as well or its intra day high made on Friday September 20th near 11475 (point I).
As far as the Nasdaq if it gets a boost from the bailout plan next week look for a rally up to either its 38.2% Retracement Level near 2225 which is also close to its 20 Day EMA (blue line) or its 50 Day EMA (green line) near 2285.
The Nasdaq 100 has a resistance area in the 1730 to 1745 range range which corresponds to its 20 Day EMA (blue line) and 38.2% Retracement Level calculated from the August high.
As far as the S&P 500 if it rallies early next week look for it to rise either up to its 20 Day EMA (blue line) near 1225 or to the 1245 to 1250 range which corresponds to its 61.8% Retracement Level (calculated from the August 11th high) and 50 Day EMA (green line).
Finally keep in mind after the initial euphoria of the bailout plan being passed by Congress is done I would be on the lookout for another sharp downside reversal later on in the week if the bailout is passed early in the week.
So far in 2008 our ETF Strategies have worked the best with SPY ETF which tracks the S&P 500 up 27% versus the S&P 500 which is down 17% for the year.
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