Yesterday's early morning earnings warning from chip maker AMD, and also Alcoa's weaker than expected earnings, took the wind out of the sails of the bulls who thought we may be close to a rebound, including me. We lost all of Monday's gains and then some. After the close on Tuesday however, Intel reported a strong quarter and the market appeared to applaud with a decent after-hours rally. It seems to be holding as I write this Tuesday evening.
We haven't been able to trust strong openings lately so we'll have to see how the day plays out before getting too excited. If we do have a good day it will show you just how difficult it is to trade our TSP accounts in the short term, with the 12 noon ET deadline. Had you panicked and got out of stocks Tuesday morning, you would have taken the losses yesterday and potentially miss any rally today. That's called a whipsaw and is very common with short term trading.
So how low can we go? When you look at market pullbacks you either have to figure out where you think the bottom will be, or you have to wait for the the turn, then get in, and potentially miss some of the rally. One way to guess at potential bottoms is by using Fibonacci retracement numbers. I don't use these very often, but they are a good place to start as there are calculable points where markets tend to stop and start. I don't want to spend a lot of time explaining Fibonacci retracements so you can read more about it by clicking here. The more common retracements are 23.6%, 38.2%, 50.0%, 61.8% and 76.4%. You can replace 23.6% with 25.0% and 76.4% with 75% to make it easier.
The recent rally in the S&P 500 from late October to late December went from about 1090 to 1214, or 124 points. A 25% retracement would be 31 points which would be 1183 (1214 - 31). Yesterday the S&P 500 market closed at 1182.99. How convenient would it be if that was it? That also happens to be be very close to the 50-day exponential moving average.
Chart provided courtesy of
www.decisonpoint.com
If that doesn't hold, the next retracement is the 38.2%. That
would put the S&P 500 at about 1166, or just about down to the breakout
point along that red dotted line. That is also very possible.
We'll see just how strong the bull market is if the 25% retracement can
hold.
Being fully exposed to stocks right now, I am holding my breath that
Intel's earnings will be the catalyst for the next rally. That is
wishful thinking as the market seems to sell off after a rally on Intel
news. I wrote about that in December. Let's hope the streak
is broken today. Even if the S&P 500 does decide to go down to the
38.2% retracement, I won't rule out a move back up to the resistance
line near 1200 first.
Sometimes we can overanalyze situations but the current environment is
very tricky. This is why the longer term investors sleep better.
That's all for today. Currently 50% C, 25% S, 25% I
fund. See you tomorrow.
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