Unlike the DJIA and the NASDAQ, the S&P shows a rounding top pattern. This is clear on the weekly chart, although it is compressed on the monthly chart. The September falls carried the S&P to these pattern target levels. The October falls carried the market well below this level and the first of the support levels at 1,050. This is the lower level of a trading band developed in 2003-2004. The failure of the lower level support near 1,050 was the first confirmation of SARS 2.
The next support level is near 800. The current rebound activity suggests a quickening pulse in the market but it is unusual for a recovery to start from a point that hangs in mid-air between confirmed historical support and resistance levels. The rebound from near 840 has no historical precedent. This suggests it has a low probability of developing into a genuine rebound point. The rally from this level is unsustainable and there is a high probability the market will test support near 800. This is a recession target -- the level where traders will look for consolidation patterns to develop.
Recovery is a 4 to 8 month process, with bouts of rallies and severe retreats. Stabilization at this level will confirm the recession diagnosis. That’s the good news.
The bear news is depressing. Failure of support near 800 will allow the market to fall towards long-term support near 500. This is a depression target. Minor support around 670 developed in 1996, but we need to go back to 1994 and 1995 before the strong, well-tested support/resistance level at 500 is found.
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The market could fall quickly to this level. However, the more provable outcome is a slow drift from recession to depression with a gentle slide and a trend with lower levels of volatility.
A depression is SARS 2 in the recovery unit for one, maybe two years. Trading conditions in this market are very different and new strategies will need to develop. Markets always fall more rapidly than they rise, simply because you do not need money to be able to lose money.
Bear markets call margin money into cold cash and this dulls the appetite for buying into any bullish market recovery. The rebound from the recession target at 800 will be slow because new money is required to fuel a new uptrend. Any rebound from the depression targets will be difficult because the quantum of wealth destruction requires a new generation to develop new wealth before money is available for the a new bull market.
We have SARS 2, but the chart suggests that it need not turn into a depression. Successful testing of support at 800 is the key event on the U.S. calendar after the presidential election results.
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