**MAILBAG QUESTION:**

"Saturday you wrote that your downside targets for S&P was reached or was close by. with the continued fall today, what are you thinking now?"

** MY RESPONSE: **

I was anticipating in my 11/10/12 *Index Wrap* what is typically a common or 'normal' retracement in the S&P 500 (SPX) of about half the prior advance; from the June lows up into the September highs. SPX went well under that 50% *retracement* level today as is seen on today's daily chart of the index.

Instead of my view of a few days ago, it now looks like SPX could fall to the next retracement area, which is (also, 'typically') in the 61.8% (call it 62%) to 66% zone.

One 'problem', so to speak, with the market bottoming after JUST giving back HALF of its prior advance is that traders are still 'too' bullish I think to suggest that a bottom was at hand this week. Bullishness took a long time to build up and now it's taking a relatively long time and a deeper correction, to get traders thinking there could be significantly MORE downside. See the chart below.

For those that are not familiar with retracement concepts or theory, I need to explain a bit about that. If you know this stuff already, you can skip over the following explanation.

**RETRACEMENTS AND THEIR HELP IN TRADE ENTRY:**

We owe some debt to Charles Dow for his observations that an intermediate trend often will *retrace* (give back) anywhere from around 1/3 to 2/3rds of the distance covered by the primary trend, before the primary/major trend resumes. There were further refinements on retracements made by W.D. Gann, a famous stock and commodities speculator of the first half of the 1900's. Primarily, Gann found it significant to use charts that had retracements noted between a major low to high or high to low of 1/4, 1/2 and 3/4ths. Sometimes Gann used thirds as retracement levels to watch for clues to a support/resistance; i.e., 33% and 66%.

The origins of one of the most useful *retracement* theories for stocks and other markets came from someone who lived in the middle ages and was studying the population growth of rabbits. Leonardo Fibonacci was an Italian mathematician who was doing such work in the early 1200s.

The number sequence that is named after Mr. Fibonacci is where each successive number is the sum of the two previous numbers; i.e., 1, 2, 3, 5, 8, 13, 21, 34, 55, 144, etc. Any given number is 1.618 times the preceding number (approximately) and .618 times the following number.

There are technical *indicators* whose formulas rely on the *Fibonacci* number sequence, but the main application is to use the so-called 'fibonacci retracements' of .382 or 38%, .50 or 50% and .618 or 62%. The number 5 is in the Fibonacci sequence, and the others are *ratios*; .618 comes from the percent that each number is of the next higher number and .382 is the inverse of .618 (100â€“61.8 = 38.2). We'll stick to the shorthand and round off to 38 and 62 per cent.

What I find most useful in trading is to track what would constitute the 38, 50 and 62% retracement points. Also, at times 66% is key retracement that marks a trend reversal point. Such a 2/3rds retracement is of course just a 'bit' more than 62% but it gives a target ZONE.

The other part of retracement theory is that once one of the major retracement levels are pierced decisively the NEXT downside target is the next of the retracement levels in the Fibonacci series. Below a 66% retracement, a 100% round-turn move back to the starting point of a rally is ALSO a retracement. This is how *double bottoms* form when the sell off stops at such a prior low.

In terms of the WEEKLY S&P 500 chart seen next: on a close-only weekly *line* chart basis there's another technical/chart consideration here: a Friday Close this week well under 1373 in SPX decisively pierces the Index's up trendline, which suggests the possibility that the intermediate to longer term UP trend could be reversing. Time will tell on this. Still, a 66% retracement isn't unusual in a major index and this is my NEXT SPX target.

Nasdaq may be headed for a 100% retracement, back to its June low. On a LONG-TERM trend basis, a retreat back to prior low that isn't EXCEEDED is still within the parameters of a long-term UP trend.

We see a retracement pattern on the big cap Nasdaq 100 Index (NDX) that even more than the broad Nas Composite suggests potential for the round-turn 100% retracement that I've discussed as a possibility once a retracement EXCEEDS 66%.

If on the other hand, we get a bounce soon in NDX from the low end of its long-term up trend price *channel* highlighted in my last chart, we could be near at least an interim bottom. NDX, as seen with the 8-week AND 13-week Relative Strength Index (RSI) is certainly oversold enough or nearly so to stage a recovery rally.

On the bearish side in terms of the longer-term trend, a weekly Close much below 2458 (the June weekly Closing Low), would be more bearish than I'm anticipating now. And perhaps suggest that the U.S. has gone off the dreaded 'fiscal cliff'. I tend to think that the market is discounting a worst case scenario and that the politicians will not want to be like Wily Coyote (chased by the Road Runner) and go sailing off that edge!

**GOOD TRADING SUCCESS! **