April 15, 2010 Analysis from Chris Kimble
 |
 |
These two charts look almost identical in that they both broke falling resistance line (1) and have pushed rapidly higher to within 1-2% of their 61.8% Fibonacci retracement levels.
If history is any guide, frequently many investors will 'harvest' gains (aka, take some money off the table), causing the markets to take a pause, at Fib resistance.
Back in 2008, the 11,250 level for the Dow and the 1,225 level for the 500 index were levels that the "waterfall or rapid crash in prices" gained downside momentum. Now these indexes have reached price points where the waterfall began — a price zone that could cause some "harvesting" as well.
Fibonacci retracements are a popular topic for market technicians. The most dramatic among them is a 61.8% retracement from a previous high or low. For non-technicians, here's an explanatory link at Investopedia, and there are a gazillion videos on the topic.
Will these two cornerstone indexes of the U.S. market pay any attention to the mysterious 61.8%? One of the things I find most interesting about technical analysis is its ability to offer countless occasions for suspense — and it's certainly more fascinating to me than solving Sudoku puzzles. So I pulled up StockCharts.com and used the Flash tool to confirm the precise Fib retracement from the intraday high in the S&P 500 on October 11, 2007 (two days after the closing high) to the intraday low on March 6, 2009 (the Friday before the closing low on March 9). The second chart shows the result. The exact number, according to the StockCharts gadget is 1228.74. If I had used the closing numbers for the peak and trough, it would be 1225.70.
The S&P 500 closed today at 1,211.67, a mere 1.1% below the daily-close retracement target. Will that level offer any resistance? Many indicators suggest the market is overbought, and as I've pointed out elsewhere, fundamentals don't encourage optimism. The S&P is up over 79% with nary a 10% correction since the low 13 months ago. We'll soon see.
"