Stock Market Forecast for Summer 2008

By: Hans_Wagner

To make money in the stock market it is important to follow the trend. I believe it is best to begin with the big picture in mind and then work our way down to weekly and then daily views of the charts. You will notice that the chart and the value of the indicators change as we move from a monthly to a weekly and then a daily chart. This is a normal part of the technical analysis.

Let's start with the long term view of the S&P 500. The Relative Strength Index (RSI) seems to be a good indicator of the cyclical bull and bear markets. In addition, the 78-week Exponential Moving Average (EMA) acts as support in a bull market and resistance in a bear market. 

In January we fell into a bear market as the RSI dropped below 50. The index fell through the rising trend line and the 78-week exponential moving average and MACD crossed below zero. This is consistent with the fundamentals of a weakening economy, and a recession. It is best to remain nimble during times like this.

The first support level looks to be just above the 1200 level. We are testing the 78 exponential moving average, which is a normal occurrence. If this resistance level holds, then it is a sign the market will fall further and you could go short.

The weekly S&P 500 below was in a bullish ascending triangle that broke to the down side. It is now being retested. If the current move up can hold then look for resistance at the 50-week moving average. 

Support is now at the 200-day moving average. RSI above 50 indicates an up trend. MACD rose up through the 9-week moving average, a buy sign. Slow Stochastic also indicates an up trend.

As predicted, we are seeing rebound to the 50-week moving average, a key resistance level. I expect this resistance level to hold and the market should pull back from here.

The daily S&P 500 chart, below, shows resistance at the 200-day moving average and at the 1,400 level. I expect these levels to hold and the market to move down from here. 

RSI is above 50 indicating an up trend. The MACD gave a sell signal indicating a move down. The Slow Stochastic signaled a move down when it fell through 80. This indicator is often early and a bit whippy, so it may move back up again. 

In bear markets, it is best to be nimble and/or use risk protection such as trailing stops, protective put options and even covered call options.

Given this perspective, it is important to be patient looking for good opportunities to enter longs that are able to overcome the downward bias in the market. For example, during the last month technology stocks have done well, helping the NASDAQ and the Russell 2000 to beat the S&P 500.

I expect the market to pull back from this resistance level and trend lower. It will be important to add down side protection to your long positions either through stops, protective put options and/or covered calls. On any rise to a key resistance level, look to go short through selected either stocks or the ultra shorts ETFs SDS, and QID.

For more insight on reading charts, you might consider:

Encyclopedia of Chart Patterns (Wiley Trading) by Thomas N. Bulkowski is the definitive study of chart patterns that includes statistical analysis of the success and failure of over 50 chart patterns.

Stan Weinstein's Secrets For Profiting in Bull and Bear Markets is one of the best books on "reading the market". It is easy to read and an excellent description of how traders and investors use technical analysis.

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.