S&P 500 NEARS TEST OF 2002-2003 LOW WHICH WOULD BE DROP OF 50% -- WHY THE CURRENT MARKET TRIANGLE CARRIES GOOD AND BAD NEWS

50% DROP WOULD MATCH 2000-2002 LOSS ... The monthly bars in Chart 1 put the last eight years of market action in good perspective. And the chart is pretty orderly. From its 2000 peak to its late 2002 bottom, the S&P 500 lost 50% of its value. From that lowpoint, it then doubled in price to reach its 2000 peak. After turning down from that long-term resistance level, it has since lost 45% of its value. It seems reasonable to expect a 50% drop which would at least match the 2000-2002 drop. From a charting standpoint, that would call for a retest of the 2002-2003 lows which aren't too far away. A lot of market analysts (including me) have been expecting an October rebound which could lead to the yearend bounce that normally takes place during presidential election years. So far, we haven't seen that. But there's still a week to go in October. In my view, the closer we get to the 2002-2003 lows, the better the odds for an eventual rebound. Not necessarily a bottom, but a rebound of some type.

Chart 1

TRIANGLES CARRY GOOD AND BAD NEWS ... On Tuesday, I suggested that the price pattern for the major stock indexes for the past two weeks had taken the shape of a "triangle". I explained that a triangle is formed by two converging trendlines as drawn on the daily bar charts of the S&P 500 (Chart 2), the Dow (Chart 3), and the Nasdaq Composite (Chart 4). I explained that a triangle is normally a continuation pattern, which increases the odds for another move to new lows (the Nasdaq has already done that). That's the bad news. The good news is that a triangle normally takes place in the latter stages of a market move. In fact, it usually precedes the final move. That's the good news. The formation of the triangle suggests that any move by the market to a new low could be the final phase of the decline that started in September. That would also bring the S&P 500 closer to its 2002-2003 low where major support is likely. All of which suggests that the current wave of global selling may be bringing the market closer to the expected fourth quarter rebound.

Chart 2

Chart 3

Chart 4