The Yellow Rose Street Beat: The significance of 800 as support and the bull case

A guaranteed way to lose in the stock market is to hold onto a bear or bull bias without always having an exit strategy in mind. On previous posts I have mentioned the number of potential ceilings that could serve as resistance in the SP. We are in a strong downtrend on the longer time frame, and a descending triangle in the short-term (last few weeks/months). We also have not completed the fifth wave down that is characteristic of Elliott Wave structure to end the downturn from all-time market highs. This implies that, based on historical data, we would see lower lows before we get a significant, multi-month, rally in the stock market. However, one cannot deny that the huge rally at the end of the week, in the face of horrendous data, strengthens the bull case for the near-term. It is also important to illustrate that we are just above a very significant long-term area of support at 800. Support is always innocent until proven guilty just like resistance is always innocent until proven guilty. Right now we are between 950 major upper resistance and then the enormous support at 800. Take a look at this long-term chart on the SP from Stockcharts.com.

Lot of people who bought around 800 after the dot com bust had very positive results. History of that magnitude cannot be ignored. Many sellers probably had an initial target of about 800 for shorts and buyers perhaps waited until we got to this region to buy. Also, it was a support after a pullback on the way up in 1997. The smart money that runs the market always wants to be a step ahead and perhaps the terrible unemployment data and fact that others are waiting for a rally allowed enough negativity for people to pause and give them an opportunity to get things started before others got in. Getting in early is a key to success... just like staying too long is a key to failure. That is for another time. Right now I just want to emphasize that there is a strong tug of war between the bear and the bull and there has been since we approached 800 on the SP in October. In the longer term the charts and fundamentals highly suggest that the bear will win. But in the near-term this is definitely a question mark. The strategy I am employing?

Nine hundred and fifty is a long way up and the 878 area proved to be very strong near-term resistance, is the 100% retracement of the recent downward move in the index , and about the 50% retracement from the move from 800 to 950. Also, as I mentioned, Elliott Wave Theory provides a probability science which gives direction as to when one is more likely to be right or wrong and hence continue the strategy or stop out. While 950 would be the maximum point of stop-loss under the guidelines form Elliott Wave International's wave count, a break of the 878 region would weaken the bear case substantially in the very near term... and provides a good place to stop out. Thus, I will cover my shorts this week if we strongly break to the 880-885 region with volume this week. This would represent a loss of less than 15% on the shorting of double longs for me (since I shorted more as we went higher and less, or not at all, as we got closer to 800). As a rule, I do not allow myself to lose more than 15% on any one position... so this all falls into line. At that time I will look for another opportunity to go short since the market is already overbought short-term.

Should we pull back and rally I would be more neutral and may look to go long with very tight stops... and be ready to stay neutral or go short or go long depending on the market action. In sideways moving markets like this one it can be very difficult to accurately determine market direction, and it makes a lot of sense to be neutral or tread lightly on either side here. In a different market I would worry much less about the overall market and probably would have held the strong stocks I like (like POT and HGSI as mentioned on the last post) but in this market the market direction so strongly affects almost all names that I feel compelled to work within the confines of what the overall market is doing. This week we should find out if the rally is for real or just another head fake. It really could go either way... which is why risk management, defined stops and price targets, and objectivity are so important. As an important reminder, and I certainly needed to be reminded of this also, it is always worth it to check out long-term charts now and again. Many of the online broker charts do not provide data needed for a long-term perspective.

Added
Additional Charts of Note.
SSO stop loss is 25 for me
QLD stop loss is 30.55 for me