Stock Market Prediction
The Smart Profits Report: Issue #444
Friday, August 3, 2007
Stock Market Prediction: Fibonacci Retracements Point Towards A Real Correction For This Market
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research
Here’s a stock market prediction: the market has arrived at a juncture - and it’s more critical than many folks might realize.
Let me break it down for you: What happens over the next few days of trading could set the stage for the next one to three months - and maybe more.
The stock market’s reaction to the May 2006 and February 2007 pullbacks was typically full of angst, as emotions ran high and investors scrambled to sell. But it’s important to remember that neither pullback was big enough (not greater than 10%) to be called a true correction.
The drop we’ve seen over the last week or so has triggered similar angst, with a growing consensus believing that the credit crunch seems more real this time… that U.S. dollar really is in deep trouble, having received a sound thrashing from most currencies. In short… yes, things could be different this time. Let’s see how…
After 5 Years, Is This Market Ready To Really Correct?
It’s easy to see why the recent stock market drop has caused such a similar range of emotions. In just six days, the market completely unwound three months worth of hard-fought price gains. The old saying that, “Markets crawl up the stairs and then jump out the window” was certainly right on the money on this occasion!
So is the market really ready for its first real correction in almost five years? Or will investors shrug off the negativity and propel the market forward once again? The charts reveal that this is a critical point…
Stock Market Prediction - More Than a Passing Fancy?
If you’re looking for a critical area for a stock market prediction on the S&P 500 index, then cast your eyes towards the 1,460 area. On the chart below, you’ll see three important times when this zone has proved very important.
So let’s trace back the S&P’s three 1,460 points:
- As you can see, the first time the index hit 1,460 was in February 2007 - a multi-year high that occurred just before the February 27 drop.
- In April, the index broke through this resistance level and powered upward for three months to all-time highs.
- This is where the index is now - trading around this important area again.
But there’s one more important piece to this puzzle…
The Fibonacci Retracement Proves Important… Again
In past articles, we’ve shown how investors use Fibonacci retracement points to calculate potential reaction areas in order to better predict the movements of the stock market.
Simply put, Leonardo Fibonacci was an Italian mathematician who devised a distinct sequence of numbers. When applied to investing, it states that a market/stock will “retrace” an upward/downward move by three main amounts - 38%, 50% and 62% (you can get more information on Fibonacci retracements in today’s “Related Articles” section).
In the chart below, I’ve drawn a Fibonacci retracement from the March 2007 lows to the July highs. And it comes as no surprise that the 50% retracement from this last stock market move takes us exactly to that crucial 1,460 level.
This highlights how important the 1,460 area is. And here’s why:
- On Tuesday and Wednesday this week, the index closed at 1,455.27 and 1,451.59 respectively on higher volume.
- Because this is under the 1,460 mark by a notable amount, it could now pave the way for the index to re-test the March low and puts an honest 10% into play.
- If however this retracement is all the downside that the market can muster for now, then look for the all-time highs to be challenged again over the next 4-12 weeks.
So this is no time to panic or go value shopping just yet. Give the stock market some time to adequately test this important support level. We’ll then have a much better stock market prediction of which direction this market will take next.
Great trading,
D. R. Barton, Jr.
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Today’s Smart Profits Action Center
- “Profits offset credit worries,” blared a MarketWatch headline this afternoon. With the market deep into earnings season, investors once again shook off negative news (rising mortgage defaults) and placed more weight on strong earnings reports from companies like Nokia. The Finnish cellphone firm said second-quarter earnings more than doubled from 1.1 billion euros to 2.2 billion euros on the back of a 28% jump in sales. Cellphone sales for the quarter hit 100 million - 29% higher than Q2 2006 figures. In response, shares shot up 8.7% to a new 52-week high of $30.93.
- Despite all three major stock indexes rising today, the market remains delicately balanced. While strong earnings might lift stocks in the short-term, longer-term negative factors like the real estate slowdown, credit woes and dismal dollar could bring the market back.
- But you shouldn’t worry about WHAT the market does, when HOW it works is far more important. It’s this kind of strategy that will produce profits in ANY market - and there’s one person who can show you exactly how to do this. To read a report that will show you how this former market maker at the NYMEX uses expertise gained direct from the trading floor to rack up profits like 111% in 14 days… 85% in 16 days… and 51% in 8 days, click this link.
Related Articles:
- Leonardo Fibonacci: Predicting The Stock Market’s Next Move With The Fibonacci Sequence
- Investing In The Stock Market: Three Factors That Could Buckle The Bulls
- Market Transitions: The Three Main Market Conditions, and a Plan for Each
The Chart Of The Week
If you look at the same Fibonacci retracement dates for the Dow as we did above for the S&P 500, we see a very interesting similarity. While the retracement isn’t nearly as deep just like the S&P, it also stops on an important Fibonacci retracement level - the 38% mark.
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