Saturday, 22 November 2008

Standard & Poor: A Fitting Description to the Index

That's right. Not only is the name of the index S&P 500 (SPX) known as Standard & Poor's but that is the best way to describe the condition of the index right now. Why say something like that about the broader based index? Take a look at how the long term chart looks and tell me if you see something pretty.

After rising up to the year 2000, the whole index has gone sideways for more than a decade. No wonder, many have had a hard time making money out of this market. Everyone was trading in a chaotic environment.

What we see on the long term chart is that SPX has formed a double top pattern that has spanned nearly 12 years. The neckline has been pegged at 770. It was breached Nov. 20 but the index has gone above it again on Nov. 21.

It's quite possible that the index will just bounce off this neckline and climb to higher levels. But the MACD tells us that's highly unlikely and that this is bound to breakdown soon as the oscillator has been lingering below the zero line. Once the neckline is broken decisively, we can expect the SPX to drop to a downside target of 375.

What would this all mean? Even if you don't trade the US market, this would affect the other markets that you do trade. It is a known fact that many countries have placed money in various funds that invest in the US markets. Normally, these funds only go long and it would be quite illogical for financial institutions to place their money in a fund that would short sell their investments. Unfortunately, going long in a dangerous market like the US is like playing russian roulette as that means going against the trend, which is downward.

When the index comes crashing down, expect a lot of trouble to come in many economies. In fact, it's already happening with layoffs being dealt left and right, the biggest of which is Citigroup (NYSE: C) with 56,000 job cuts so far. They've even gone as far as considering the idea of selling the whole company.

Remember the biblical saying: Those who humble themselves will be honored and those who honor themselves will be humbled. The time for the US to be humbled is at hand.