Stocks Could Explode Over the Next Two Days
By Jeff Clark
February 28 , 2008

We're nearing the end of February, and it's time to take another look at this chart...

You may recall the last time I showed you a monthly chart of the S&P 500 plotted against the 20-month exponential moving average... It helps signal bull and bear markets. If the S&P 500 is trading above the 20-month EMA, then stocks are in a bull market. If the average is below the line, then the bear is in control.

More importantly, though, this chart gives us a roadmap of what to expect along the path of a bear market.

For example, last month I explained that even though stocks had entered a bear market – by virtue of the S&P 500 trading below the 20-month EMA – the odds favored a rally back up to test the breakdown point. In fact, that's a typical pattern for stocks in the early stages of a bear market – breakdown, followed by rally to retest the breakdown level, and then another decline.

You don't have to look back any further than late 2000 to see that pattern and the similarity to how things look today.

The S&P 500 is up about 55 points since January 25. That's a gain of about 4% – which isn't too bad for one month. But you'll notice the average is still about 40 points below its 20-month EMA. So it looks like we still have a little more room to rally.

The Next Five Days Will Determine the Market's Fate As Good a Sell Signal as You'll Ever See

Maybe stocks will explode higher during the final two days of this month, or perhaps we'll continue to get whipsaw type movement all the way through the end of March.

Either way, it's still too early to get overly aggressive on the short side. And if you bought stocks last month when I showed you this chart, then it makes sense to hold on to them a while longer.

Best regards and good trading,

Jeff Clark