Dimitris,
I may be a pain in the butt, however I am always SERIOUS when it comes to investing/trading.
I'm not sure what the question was/is, are you ? Was it the prediction of where do we go from here ? and what do we do when we get there ?
I have been asked by others from time to time to "predict" what will happen. This is a question I usually try to avoid answering because although from time to time I will use a manual override in a conservative way on systems that I write and trade as I recognize that NO system can be the holy grail and that I would rather err on the side of safety, I clearly fall in the camp of system traders as opposed to discretionary traders. As I stated before this is NOT necessarily "right" or "better" then any other method, it just happens to be the method that works for me. To my way of thinking system trading deals with the probabilities of what will happen and what to do when they don’t which in a way IS a prediction, but only in terms of the next bar or so and depending on ones investing/trading time frame is in terms or minutes, hours, days, weeks, months or beyond. After all if we know whether the next bar is going to be up or down, isn’t that really all we need to accomplish our objectives ? If we have done our homework in the development of the systems we trade then we pretty much know what to expect the systems to do i.e. they are going to be correct some percentage of time and wrong some percentage of time and return some known percentage with some level of risk.
Now if you are asking what’s my best “guess” as to what’s going to happen then I “suspect” that the bear market lows have not yet been seen and that based on a variety of long term analysis that the market in terms of SPX could well get below 600 before we’re done. One could use as supporting evidence at least the following things:
1. The very large head and shoulders formation that’s present over the last several years in several of the major indices with the shoulders being in the latter parts of 1998 & 2001 in which all price activity of the past several months is below the neckline. In the case of SPX with the head being at 1552 and the neckline at 933 this is a 619 point loss or roughly 40%. From where SPX crossed the neckline at roughly 952 in 7/2002 and down by 40% yields roughly 572.
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2. The very long term trend line on the constant dollar SPX has only recently been broken to the downside and probably points at prices even below 572 i.e. maybe the 1995 lows.
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3. The Price/Retained Earnings ratios although they have dropped significantly have not reached levels attained at other long term historical lows.
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Now on the other side of the coin might be a variety of long term cycle analysis tools:
1. Like Benner or the well known Erlanger or its components the Decennial or Presidential cycles all of which say we “should have” already bottomed.
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2. Some sort of long wave analysis which seems to suggest that although a bottom may have already occurred that we can’t expect to do much more then go scraping along it for some time to come.
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So there you have it, my best “guess” plus some other things that are possibly contrary to that “guess” and it’s worth exactly what you paid for it. Will it happen ? I have no idea, does this impact what and how I trade ? ABSOLUTELY NOT.
Fred
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