Friday, September 23, 2011

Retesting 1100 on the S&P 500

Regular readers of our newsletter know that we have been calling for a retest of the 1100 low we made on the S&P 500 last month. As I write this the S&P 500 futures are at 1111 (close is good enough in horseshoes, grenades, and stock market levels). Our readers might also remember that we called for 7200 on the Dow back in 2008 when the market was still near 13000. Does this mean we have a better crystal ball than everyone else? No. A simple understanding of market dynamics would tell you that a retest of 1100 was nearly inevitable, unless you still believe that markets are efficient or random.

Markets cannot be efficient or random because they are traded by human beings, who are not efficient or random. Because human beings are driven by greed, fear, and ignorance there is an emotional interplay that goes on in markets. Certain important lows and certain important highs become important. When we make a significant low, like 1100 in August, we typically will test it one or more times before a rally. Therefore, with the crisis in Europe far from over and nothing improving in our economic picture it was fairly safe to assume that we would see 1100 on the S&P 500 again.

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