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I neglected to write about the approaching Fibonacci level in April because I assumed that most of my readers would have seen it coming from a mile away. But perhaps it did deserve our attention more than we thought, especially considering the jolt that we got from the “flash crash”.
The 61.8% Fibonacci retracement from the 2007 market top and the March 2009 bottom projected to 1225.70 for the S&P 500 index:
These levels are watched by technical oriented traders because they believe that it is at these levels that the trend will exhaust itself and reverse. The S&P 500 didn’t quite reach that level, only managing an intra-day high of 1219.80 in April 2010.
If we go below the February lows, then we will have not only a lower high but also a lower low -the definition of a down trend. We are still quite a ways away but if we see step into an empty elevator shaft again like we did on May 6th it will be a lot closer.
One of the people who did have a very close eye on the 61.8% Fibonacci retracement level was Robert Prechter. He used that as one of his main rationales for exiting the long position he had in March 2009 in US equities.
In the recent EWI Theorist, Prechter explains why he believes this is not only the end of the secular bear market rally which he foresaw in February 2009 but more importantly, why it is a major top which will take prices down much further than most imagine:
This rally has been sharp, but it has gone on too long to fit into a four-year cycle profile, so we have to treat the 4-year cycle as also gone.
Prechter then outlines the longer time cycle which he believes is in effect now. If you’re curious about market cycles or are a fan of cycle theory, you’ll especially enjoy what follows.
The Fibonacci retracement level applied to the Dow Jones Industrial also provided a cautionary signal:
As I explained to a reader who criticized Elliott Wave theory, I defer to the results. Prechter has the distinction of making a clear and timely call ahead of the March 2009 bottom. And then he started to make very bearish sounding noises last month. While most people recognize in him an uber-bear, he has shown an uncanny ability to dodge and weave, accommodating himself to the market environment as it changes, rather than insisting that the market adapt to his views. So for that reason, he has a hot hand and my attention. In any case, there is no obligation, the analysis is there for the taking for free.
There are a myriad paths to market analysis and I try to stay humble and not allow prejudice to keep me from considering any one particular path. Especially one that yields results and provides a real understanding of the dynamic forces at play. To those that lock themselves up within only one dogmatic viewpoint I offer you this eloquent and timeless advice from Bruce Lee:
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