Saturday, June 25, 2005

Just Another S&P Reaction?

As you know I am very bullish on stocks and in particular on the stock indexes. I am predicting that the S&P 500 will reach the 1350 level by the end of the year.

So far the drop from the June 20 top at 1225.20 in the September S&P futures has carried the market down more than 30 points, quite a bit farther than I was expecting. This begs the question of whether or not the uptrend from the April low at 1135.80 (overnight) has ended and if so how much lower the average might go.

My box theory says that reactions within an ongoing trend are usually only ½ a box in extent but can be as big as a full box. Anything more than a full box reaction casts doubt on the trend direction.

Another yardstick I find useful is the length of the biggest reaction within the trend thus far. A reaction that is bigger than this also casts doubt on the presumed trend direction.

In the case of the S&P futures, I am working with price boxes up from 1136.80 (the daytime low) that are 43.70 points high. The market hit the top of the second box in the uptrend at 1224.20 and could go as low as the bottom of the second box at 1180.50 without negating the box theory evidence for this uptrend.

The biggest reaction in the trend so far carried from 1180.50 (daytime high) on May 9 to 1147.20 on May 13, a total of 33.30 points. A reaction that big from the 1225.20 high would end at 1191.90. My experience tells me that the 1191.90 level is more likely to mark the low of this reaction than is the 1180.50 level. It also coincides with the ¼ division point of the second box.

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