The 38% Level

There hasn't been a Sarah Palin bus tour in a while, so instead we get eight more GOP debates. Woohoo. Maybe that's the why the market is sliding. Only 21% of stocks in the S&P 500 are above their 50 day moving average. What does that imply? Stocks are pretty oversold, but they can get oversold-er.

Lovers of Fibonacci and Eliot Wave Theory will view Monday as a high probability turning point. The Fibonacci sequence (1, 2, 3, 5, 8, 13, 21, ...) is well regarded in mathematics and science. In this instance, I'm referring to the convergence of its ratio: 1.618 (the Golden ratio). The 0.618, or 61.8%, and 0.382 (1 - 0.618), or 38.2%, are used to help predict turning points after the market retraces from a rally. Measuring from trough to peak, one identifies the different levels and waits for the market to commit before buying/selling (check the chart below for those levels).

Click to enlarge

You might notice that the number 8 is also a part of the sequence. We've had 7 down days in a row. Given its level, it is reasonable to assume that on day 8, we will see a turn to the upside. Many superstitions and self-made rules are derived from the numbers in the sequence. For example, if the market is up two days in a row, do not buy on day three. If the market is up five days in a row, it will be down three days in a row right after that.

Anyways, it works until is doesn't. The fact that so many people believe it is enough to at least follow it.

So expect a bounce here. The financial news media will attribute it to better-than-expected Black Friday sales. Whatever. Believe it or not, I still experience joy despite not owning a smartphone or Playstation 3. ... Enjoy the next few days of upside. Just don't go all-in, because the bears see it as a great shorting opportunity. It's still a volatile market, not to mention Europe is still trying to rearrange the furniture aboard the Titanic.

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-R