S&P 500 COMES CLOSE TO 62% FIBONACCI TARGET NEAR 660 -- ELLIOTT WAVE ANALYSIS SUGGESTS BEAR MARKET IS CLOSE TO COMPLETING WAVE 3 WHICH STARTED LAST MAY -- THAT SHOULD LEAD TO A WAVE FOUR BOUNCE AND ONE MORE DOWNWAVE

S&P 500 COMES VERY CLOSE TO 62% RETRACEMENT ... Some of our readers have asked me to revisit potential downside targets for the market. Chart 1 is an updated version of a chart I showed on February 27. That earlier chart showed that a 62% retracement of the secular bull market from 1982 to 2007 fell around the 660 level for the S&P 500 (third line). I point this out today because the S&P came within six points of that downside target yesterday. There's no guarantee that stocks won't fall below that potential support line, but the fact that it's so close may be reason for some technical traders to do a little bottom fishing. Although I can't show it here, there's another very long-term support line drawn under the lows of 1932, 1942, 1974, and 1982 which currently sits near 560. That's approximately 100 points (or 15%) below this week's intra-day low. [That chart is shown on page A6 of today's edition of Investors Business Daily]. I wouldn't be at all surprised to see that lower line tested before this bear market runs its course. If it is, let's hope it holds.

Chart 1

FIBONACCI ISN'T SOMETHING YOU EAT... Don't think for a moment that all financial networks are equally knowledgeable about technical matters. I experienced a good example of that difference this week. Bloomberg radio interviewed me about my downside target for the S&P 500. Before giving my next S&P target at 660, I asked the reporter if she knew what a 62% Fibonacci retracement was. Her answer was "of course" and we continued the interview. Yesterday morning a guest on CNBC tried to use a 62% retracement to explain his next downside target. The anchor dismissed "Fibonacci" as something he ate for dinner and said it was too "intricate" to explain on television. [Readers of the Second Edition of the Visual Investor know what I think of most media reporting]. Fibonacci numbers and ratios are an important part of Elliott Wave theory. It's important to combine the two. Chart 2, for example, shows the first wave down from October 2007 to March 2008 occurring in five smaller waves. After that first downwave was completed, the S&P 500 retraced nearly 62% of the previous decline before turning back down again.

Chart 2

ELLIOTT WAVE 3 ... It's been awhile since I wrote about Elliott Waves. This is as good time as any to do so. I warn you, however, that Elliott Waves can be very subjective. The most important thing to remember is that a bear market usually takes place in five waves -- three downwaves (waves 1, 3, and 5) two bounces (waves 2 and 4). The boxed 1 and 2 waves in Chart 2 show the first two major waves from October 2007 to May 2008. I believe that major wave 3 that started last May has broken down into five smaller waves as shown in Chart 3. That would make the last drop since January a fifth wave in major wave 3. That should lead to a counter-trend up move which would qualify as major wave 4. That counter-trend wave 4 could reach the January high which would be a 38% retracement of the decline since last May (see Chart 4). That would leave one more downwave

Chart 3

Chart 4

A CLOSER LOOK AT WAVE FIVE... Chart 5 shows the last downwave that started in early January. The current downwave should complete major wave 3 from last May which could give way to a more substantial bear market bounce. The question is whether the current downwave is complete. It doesn't appear to be. Each downwave should take place in five waves. The numbers in Chart 5 show only three clear waves so far. If this is just a minor wave four bounce from the January high, the S&P 500 should meet resistance in the 38% to 50% Fibonacci retracement zone. That would leave room for one more dip into new lows which would bring us closer to the 62% retracement target in Chart 1. The bottom line is that the market appears to have entered a short-term bounce which could retrace 38% of its decline since January. Another dip into new lows (or a retest of the March low) could then set the stage for a more meaningful (bear market) rally which could carry all the way to the January high. The good news is that the S&P 500 appears to be at or very close to a meaningful bear market bounce. The bad news is that there may be another downleg after that.

Chart 5