Doomsday, Dec 21st 2012, may be almost a year away according to the Mayan calendar, but catastrophic downside for stock market indices is likely more imminent. Even in this Presidential election year, a return to March 2009 Bear Market lows is a definite possibility. Perhaps the only question is... when?
A Technical View Against a backdrop of slowing growth and looming debt crises, both in the U.S. and abroad, stock valuations appear to be suspect:
Based on current forecasts, U.S. debt will likely eclipse GDP in 2012 even as economic growth slows in the United States. Monetary and fiscal policies are unlikely to be supportive in the current environment;
Bloomberg reports that over $200B in European debt will come due in the first quarter of 2012 and that the Euro Zone will likely enter recession;
Morgan Stanley has recently revised growth forecasts in emerging markets downward from 6.1% to 5.7%. Even that growth prediction is contingent upon supportive policy decisions from the U.S. and Europe.
Technical analysis also suggests that downside will resume early in 2012. Elliot Wave Theory identifies the current S&P 500 price pattern as the onset of intermediate Wave 3 down (see Figure 1 below). By definition, Wave 3 down includes the largest price move in a five-wave pattern. This would imply a downside target of roughly 950 or less for this wave movement alone.
From the chart in Figure 1, constructed at author's submission of article on January 1st, we can also observe the following:
Key resistance for the S&P is at the October high of 1292 with key support at the December 20th low of 1242;
The 50 day moving average remains below the 200 day moving average; note that this is the so-called “death-cross,” which some treat as the defining indicator for bear market conditions;
Index closing prices are still hovering near the benchmark 200-day moving average;
Daily Stochastics show that the S&P 500 is currently overbought as a result of the recent but muted “Santa Clause” rally;
Current price formation is that of a rising bearish wedge.
Any further upside rally in early 2012 should be contained in both price and duration. If prices fall below 1242 without reaching fresh highs, wave 3 down has already begun. Instead, a definitive break above resistance at 1292 would suggest an alternate wave count and could ultimately lead prices as high as 1350 before wave 3 down begins.
Should the rally continue, this final upward move may also foster conditions for a second, confirming “Hindenburg Omen.” The first instance of the indicator was observed on December 19th 2011. A second observation within a month would provide very reliable foreboding.
In any case, Greek readers should consider taking trading profits from this recent rally to avoid the coming "stock-apocalypse."
Disclosure: I have no position currently, however, I intend to sell (short) S&P futures at 1275.50 or higher.
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