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TECHNICAL ANALYSIS


A Potential Downside Target For The S&P 500

03/22/04 01:35:31 PM
by Kevin Hopson

The S&P 500 Index looks to be headed lower in the near-term but when will the bleeding stop?

Security:   $SPX
Position:   Hold

Even though the S&P 500 Index ($SPX) rallied last Tuesday and Wednesday after an abrupt sell-off, the short-term outlook remains bearish. There are many reasons for this. First of all, the index failed to move above broken support around the 1125 level. This is the site of March's trading range breakdown, as illustrated by the green lines. It is also the site of the index's 10-day moving average, the black median line and the 38.2 percent retracement level (1125.75) from this month's decline. As a result, the path of least resistance is still down.

If this is true, how low will the index go before putting in a short-term bottom? Well, the trading range collapse indicates a potential downside target between 1055 and 1090. This price target was calculated by taking the number of times that prices tested the bottom channel line in alternate sequence (2), multiplying this by the width of the trading range (1160 - 1125 = 35) and subtracting this figure (35 x 2 = 70) from the top (1160 - 70 = 1090) and bottom (1125 - 70 = 1055) channel lines.

Graphic provided by: Stockcharts.com.
 
In other words, the index appears to have 2 to 5 percent of additional downside in the near-term. However, there is a nice confluence of support around the 1090 level, which could act as a higher reversal point for the index. For example, not only is this the site of the bottom black parallel line, but it is also the site of the 50 percent retracement level (1090.75) from the late October '02 low to this month's high. As a result, I might look to buy on a potential pullback to this support level. Until then, staying on the sidelines is probably your best bet.



Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.

Glen Allen, VA
E-mail address: hopson_1@yahoo.com

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