In this post, I talk about the 2004 comparison. Please refer to the article I posted on the slope here: http://slopeofhope.com/2010/01/cp3o.html
This next week will be very telling of how the next few months should play out. Recently the 20/50 moving averages have crossed (both exponential and simple moving averages), a commonly used signal. Consider two different scenarios in the past when there was a crossover: 2004 and 2008.
In 2008, we had a 20/50 cross which proceeded with a pretty nasty drop.
However, in 2004 we had a similar 20/50 cross (fake-out) and the outcome was a zigzag combination corrective wave before heading to new highs.
To put this into relative perspective, in 2004 the first retrace down from the top was 20.3%. We rallied back up 83.4% of that down move. Recently, we have retraced 21.9% from the top. A similar rally back up (80%ish) would put us around SPX 1120-1130. Any more downside (new lows) will throw away the 2004 scenario.
We have had four down weeks so far, and the last time we had 5 down weeks was almost 2 years ago. At this point a majority of the move has occurred and I think the risk outweighs the reward for counting on this week to be the 5th down week.
The trade should be easy to set up. If we make new lows this week, then look out below but if we begin a bounce, it could take us up to the 1120-1130 range (or even to new highs as some EW counts suggest).
Now, in no way is the economic situation today even close to that of 2004. However, for the sake of completeness, it is beneficial to consider this as a possibility. The outcome will end up determining whether the deflationists or inflationists are correct.
