The Smart Profits Report: Issue #486
Wednesday, January 9, 2008 Market Forecast: What Technical Analysis Says About The Markets In 2008
By Jim Stanton,
Technical & Quantitative Analyst, Smart Profits Report At this time of year, the financial world is chock full of predictions and market forecasts for 2008. The pundits simply can't resist having a punt on what will happen.
Right now, you dont have to look very far to find economists and commentators ratcheting up the chances of a recession this year. In fact, Martin Feldstein, chief of the National Bureau of Economic Research (NBER), just declared that a recession is more likely than not. If the first four trading days of 2008 are anything to go by, the bulls certainly have some work to do to arrest an alarming slump. With the bears in full control, its been anything but a Happy New Year so far. Over those first four days, the Dow Industrials slumped 437 points; the Nasdaq 100 lost 128 points; and the broader S&P 500 had shed 52 points. As of 1:00 PM today, the fifth trading day of the year, the Dow was down another 54 points, while the Nasdaq and S&P 500 were flat. So no first five days joy this year. As for January overall, well have to wait a few more weeks to see how it plays out. But that doesn't mean I can't give you some real guidance in the meantime... 2008 Market Forecast - Place Your Bets On Short-Term Action Despite what the Stock Traders Almanac statistics say, or what other fancy indicators might suggest, I've never made my investment decisions based on things like the January Barometer, who wins the Superbowl, how often it rains on Wall Street throughout January, or how loud Jim Cramer yells at the Federal Reserve. In my experience, trying to forecast where the stock market will end up one year from now is an exercise in futility. It's very difficult to do in the first place, and you never know whats going to happen over 12 months. My proprietary technical analysis, and the ESP Profit System that I use to chart the markets movements and plot profit opportunities, is more effective over the short and intermediate-term. It's dynamic analysis, based on real factors, not just statistics. So let's take a look at what's in store... Indexes Crumble To New Correction Lows With the market carnage lately, it seems a long time ago that the large-cap indexes made their highs. But it was only as recently as October 2007. Their small-cap neighbors did the same in July 2007. But on Monday, the Nasdaq indexes, S&P 500, Russell 2000, S&P Small Cap, and Dow Transports all made new correction lows. Quite a turnaround and fast, too. And I've got news for you based on the chart patterns, my ESP Profit System is calling for lower prices at least over the near-term. Lets deal with the Nasdaq first... Market Forecasting A 180-Degree Turn For The Nasdaq Since late December, the Nasdaq 100 has led the way lower a 180-degree reversal from the start of the fourth quarter when it was leading the indexes higher. Having then consolidated for almost two months, though, it traded below the lows set back in November, as you can see on the chart below. 
In making new correction lows, the Nasdaq 100 also closed below its 200-day moving average, a development not seen on the index since May 2006. In doing so, it projects a shorter-term downside target around the 1,920 level, according to the pattern recognition component of the ESP Profit System. But a look at the weekly chart below tells us that if the index closes below 1,929, it may have longer-term repercussions. 
As you can see, the longer-term uptrend line, drawn off the July 2006 lows, was tested in early trading on Monday and the index rallied later in the session. The Nasdaq 100 has become oversold in the short-term, so a rebound off the trendline was not surprising. The index also got very close to the shorter-term downside objective around the 1,920 level, which makes Mondays low an important level. The indicator at the bottom of the chart is a Stochastic Oscillator. This is basically a momentum indicator and it's turning negative. From here, it points to two possibilities: - If the Nasdaq 100 can hold in the 1,929 area and reverse, the correction may be over.
- However, if it drops down to the 1,920 level (more than just a quick downward move), it will confirm the negative Stochastic reading and break the trendline, which will raise concerns over the longer-term health of the market.
Whenever I do market analysis, I always look at a number of indexes in order to get a broader look at whats going on. So lets move onto the broader S&P 500... The S&P Goes Low 1,370 On Tap While the Nasdaq 100 is still holding above its uptrend line, the S&P 500 made new correction lows on Monday. As you can see from the weekly chart, it closed below its trendline for the second day in a row. 
The index is also well below its 40-week (200-day) moving average and by making new correction lows, it should lead to a test of the August 2007 low at 1,370. This is close to a Fibonacci projection at 1,362. So is it all bad news? Not quite. Based on some alternative downside projections, there's an outside chance that the correction has ended. However, the S&P 500, Nasdaq Composite, Dow Industrials, Dow Transports, and all the smaller-cap indexes have closed below their weekly uptrend lines. That's a pretty big headwind that investors are battling. It also tells me that the odds favor at least a test of the 1,362-1,370 area on the S&P 500 and 1,920 on the Nasdaq 100 before a meaningful reversal can take place. Good investing, Jim Stanton Today's Smart Profits Action Center - While the volatile stock market leaves many investors scratching their heads over the next move, Jim Stanton has spent 30 years charting its developments and pinpointing where its headed next, making investors, hedge funds and institutions a lot of money. Jim has devised a proprietary technical analysis model and is the lead editor of the powerful, cutting-edge ESP Profit System, which rigorously analyzes both market indexes and stocks to nail down their movement with deadly accuracy. This allows investors to see whats going to happen, how much the asset could move, and when it will occur, so they know how to take advantage. For more information, please call our VIP Trading Services Team at: 888.570.9830 or: 410.454.0498.
- Yet more problems in the real estate market put pressure on stocks again today. The National Association of Realtors said its pending home sales index slipped 2.6% in November, extending a downturn that has arguably burdened the U.S. economy more than any other development. In a research note, Lehman Brothers said the correction has caused a dramatic decline in earnings at lenders like Countrywide Financial Corp (NYSE: CFC), which is now at serious risk of bankruptcy. Major homebuilder KB Home (NYSE: KBH) is faring little better. The company reported today that its fourth-quarter loss rocketed to $772.7 million ($9.99 a share), compared with a $49.6 million loss ($0.64 a share) in Q4 2006, and projected another tough year.
- As a growing number of economists put their necks on the line and boldly call for an economic recession this year, investors are scrambling for help. That means most eyes are focused on the Federal Reserve. The monetary policy committee meets again on January 30-31, with investors hoping for another bailout. The question is: Can the Fed provide economic relief through interest rate cuts without triggering inflation? Philadelphia Fed President Charles Plosser has noted this himself. And having already cut rates three times in recent months, with little effect, its powers look limited.
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