Two Scenarios For The Stock Market - How Will It Play Out?

I’m going to jump right into analyzing the stock markets today but before I do so, I should advise that on top of my technical analysis, I will be making some extended predictions as well. I’ve been accurately predicting reverses this entire year, and I expect this prediction to follow through as well.

Let’s first look at Friday’s action:

What can you tell me about Friday’s action? What type of candlestick did we get? Of the four pictures, which one would you pick?

Would it be a long-legged doji reflecting the indecision of traders? Perhaps…but Friday’s action is more of a toss up between a long-legged and dragonfly doji. This is a very bullish sign in this specific trading environment. Further this doji is backed by an over extended sell off and an over extended volatility index as mentioned in my We’re Making History! post. From a technical standpoint we will be going…wait for it, wait for it…bullish this coming week.

The panic we got last week was fantastic. This type of scare is exactly what the market needs if it wants to recover. After Friday, I can comfortably say that a short-term bottom has been set in. Again, this is a short-term bottom, not a bottom! It is impossible to pick a long-term bottom without strong technical and fundamental support. So this is where my prediction comes in. In the coming weeks, two scenarios can pan out. One favors the bulls and the other favors the bears. Mark Oct 22, 2008 on your calendar, by this time we should have a better understanding of the long-term market direction. Below is a 4 month chart of the S&P 500 with the 2 scenarios.

Scenario 1-bullish move: We retrace less than 40%, from here we will retest support. If we hover around support, a Christmas rally is still possible.

Scenario 2-bearish move: We retrace close to 50%. Unable to break past 50% we will shoot downward with strong force breaking support.

The 1st scenario would be best for the bulls. A long-term bottom rarely ever has a “V” shape, so this “V” formation would be unhealthy for this market. A “V” often leads to another leg down.

Again, just to sum it up we should be expecting a sharp bounce this coming week. Is this a bottom? Only time will tell. For the time being, pay attention to key levels and the above scenarios as we approach Oct 22, 2008. If you do plan to go long, keep tight stop losses in place. The overall trend is still down, take this opportunity to get out of your existing longs; sell into the rally because others will be doing the same.

I only write when technical analysis indicates that a reversal is developing so it doesn’t look like I will be making a post anytime soon. For this reason, I should point out that Apple (AAPL) is at support right now. I have been holding Apple this past week, and my near target is at $120. There is resistance at $121, so keep a close eye on that.

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