AN INTERMEDIATE MARKET BOTTOM COULD RETRACE 38% TO 50% OF THE OCTOBER-MARCH DECLINE AND LAST APPROXIMATELY ONE TO THREE MONTHS

WHAT DOES THAT MEAN?... Last week I suggested that the stock market was most likely putting in a bottom of intermediate proportions. One of our readers asked me to define what constitutes an "intermediate" rally. I referred to my book "Technical Analysis of the Financial Markets" for the correct definition. Here's what it says on page 26: "The secondary, or intermediate, trend represents a correction to the primary trend and usually lasts three weeks to three months. These intermediate corrections generally retrace between one-third and two-thirds of the previous trend, and most frequently about half, or 50%, of the previous move." That means that there are two components of an intermediate rally -- price and time. By comparison, a "short-term" rally usually lasts about two weeks. Chart 1 plots weekly bars for the S&P 500 over the last year. Since the market top last October, there have been two previous bounces lasting two weeks (see circles). The first short-term bounce during November regained 62% of the first decline. The second bounce in January retraced 50% of its previous downleg (and 38% of its entire decline). If the current rally is more than a short-term bounce, it has to last more than two weeks and should retrace 38% to 50% of the entire downtrend.

Chart 1

PERCENTAGE RETRACEMENTS... Chart 2 shows upside percentage retracements measured from the October top to the March bottom. A 38% retacement would put the S&P up against its February highs, which is a logical upside target. That would also be the minimum upside target in an intermediate rally. There's a possibility, however, that the S&P 500 could retrace as much as 50% and still be within the confines of a major downtrend. The 50% line also corresponds roughly with the November low. Those two lines define possible upside targets if the market has in fact put in an intermediate bottom (as I suspect it has).

Chart 2

POSSIBLE TIME TARGETS ... From its October top, the market fell for 22 weeks. Using a 50% time retracement, that would limit an intermediate rally to about ten weeks from its March bottom. The last downleg from February to March lasted 6 weeks. That's probably a minimum expectation. Since we're already two weeks into a rally attempt, that suggests the "possibility" of four to eight weeks of rising prices in an intermediate rally. Using the broader definition in my book, the rally could last three weeks to three months from its March bottom. Whenever the intermediate rally does run its course, an eventual retest of the recent lows appears likely. That's what usually happens after a five-wave decline.

Chart 3

MARKET HAS RETRACED 38% OF ITS BULL RUN ... In case you're not aware (or have forgotten), the S&P 500 is finding support at its 38% retracement line measured from its 2002 bottom to its 2007 top (Chart 4). That's a logical support point. However, the stock market has fallen in five waves. In Elliott Wave work, that usually suggests the possibility of another downleg after an intermediate rebound. At the very least, that would call for a retest of the recent lows at some point later this year. A more bearish scenario would be a 50% drop back toward the 1200 level (possibly by the autumn). So while the market is looking better over the short- to intermediate-term, it's longer range trend is still in danger.

Chart 4