Before the trading week begins, I wanted to share a chart explaining why its critical that the market holds the 2002 lows that we once again broke last week:
This chart only runs through 2008. We have dropped some more since this was put together so here is where we are at. We now currently sit at 770 on the S&P which means we officially are below the 2002 lows. However, we are still sitting above the S&P closing low of 751 for the current crisis that was set in November.
Luckily in November, the S&P quickly rebounded from 751 low and quickly moved up over 800 which got us out of the woods. Folks, anything under 775 means that we are in the danger zone in terms of breaking the lows. Sitting here at 770 means we are once again staring over the edge of a cliff. Its critical that we hold 751 this week.
The reason I say this is if we break sharply south below 751, there is almost no resistance in the chart until we get back to the 1995 levels on the S&P. As you can see above, the S&P was at 500 back in 1995!
That's a potential 30% move to the downside from here. Pretty frightening isn't it? Now if we break below 751 it doesn't mean we head straight down to the 1995 levels. However, a sharp move south below 751 could definitely bring us to the 600 level on the S&P in a very short period of time.
If we break right through 751 I will be adding some short positions. Ultimately, my best case scenario is 1995's 500 level on the S&P marks the bottom in equities.
This was initially my market low, but I have now taken this off the table because the government policy response to this financial crisis has been disastrous. The economy has slowed much more sharply than I had originally anticipated and economies all over the world are on the verge of collapse.
If transparency doesn't come back to the markets, I think we could head down a lot further below 500 down the road. I mean lets be honest: We dropped 90% in 1929 and many are now saying this situation is worse. As a result, how can you take this off the table?
I highly doubt a drop like this could happen, but then again, I have said that about a lot of things during this crisis only to find out later that the impossible is possible.