With the markets having matched the lows made in 1996, and the S&P; 500 closing below the 700 level a couple of days ago, the question remains where the next support, which may provide a temporary bottom, is.

In times like this, it pays to look at technical support and resistance levels for the various indexes. Let’s focus only on the widely followed S&P; 500 and review what MarketWatch had to say in “Further losses likely before the next major low:”

After concluding its worst six-month span since 1932, the Dow Jones Industrial Average has broken into the 6,000s to start March.

Based on the current backdrop, an eventual retest of the S&P; 680 area looks increasingly likely.

There you have it. What this simply means is this. If a rally materializes, expect it to run into resistance at the 729 level; if that gets pierced, then watch out for the 741 level.

On the downside, support may kick in at around 680 and, if that is taken out, we may be looking at 600, which many forecasters have called to be the ultimate bottom.

Based on feedback from readers, most seem to have understood the hedging concept as outlined in my new e-book pretty well. One reader had this to say:

Many thanks for your post on hedging.

Is not the outcome from a hedging strategy a function of the funds and the short position chosen? I am confused.

The idea is for us to enter the market at an earlier time, after a bottom has been formed, prior to our Trend Tracking Index (TTI) signaling a buy. This early entry will allow us to participate to some degree in any uptrend that materializes. I say to some degree, because at that moment we are holding a hedged position and are not outright long, which limits our potential gains.

On the other hand, as you can see by the examples in my book, if the bottom suddenly drops out and the markets head south, we are well covered and can make money at that time as well.

My idea is not, as you mentioned above, to make this a substitute for being in a money market fund. You are still invested in equity positions and have market risk no matter how well you are hedged. However, you enjoy far more protection from market swings than if you were outright long or short.

To be clear, there will be times when the hedge may not work as well, but I personally prefer the reduced risk, especially when engaging in some bottom fishing. Be sure to follow the five rules as outlined, which will increase the odds of you being successful.

If you are hesitant at all, test it out yourself. Put on a small hedge in an IRA account (so you don’t have to deal with taxes) and invest based on my ideas. Be sure to track your positions on a spreadsheet matrix like shown in the book so you get the feel as to how this hedge moves, before committing a larger amount.

Over the past weekend, I was reading about the severe winter storm that was forecasted to blanket the East Coast. It seems that part of that storm took direct aim at Wall Street and sent the bulls heading for cover as the month of March started out on another sour note.

The major indexes got clobbered again and are now at levels last seen in 1996. The S&P; 500 barely hung on to the 700 level, but there’s a good chance that it will be taken out. That leaves most people wondering as to “how low can we go?”

In the past, I have quoted those who have better skills in the fine art of forecasting than I have. Some, whose opinion I value, have predicted the bottom in the S&P; 500 to be in the 600 to 650 range. Much to the chagrin of the buy-and-hold folks, we’re almost there.

In December, in my blog post “Short-term Bullishness,” I referenced an article by Mish Shedlock who, based on his assessment of the Elliott Wave Theory at that time, pointed to a potential bottom of 600.

While my guess would have been for this bottom to occur either late in 2009 or in 2010, only 3 months after the above posting, we are within striking distance. It’s simply a sign that, economically speaking, things have deteriorated not only at a rapid pace but also with great magnitude.

All bailout programs have failed to stop this trend, and I have repeatedly voiced my opinion against pouring tax payer money into bottomless sinkholes like AIG and many others. It will take time and, unfortunately, more destruction of assets before a bottom will manifest itself.

Fortunately, by simply following trends, we will be in a position to take advantage of such a turnaround whenever it occurs.

Apparently, even last year’s market meltdown did not detract some from continuing the most useless discussion of the past few years.

The topic is as to whether ETFs are better than mutual funds. MarketWatch reports as follows in “Actively managed funds lose share to index rivals:”

Mutual fund investors in 2008 yanked more money out of actively managed stock-funds than they put in for only the third time ever, and index-fund rivals took the spoils.

[My emphasis]

And chasing performance is a bad thing, while focusing on asset allocation is a good thing? Leave it up to Morningstar to (again) dispense that much garbage. They still haven’t figured out that those portfolios with fancy asset allocations got killed last year as they did in the bear market of 2000.

For a while now, they’ve been jumping on the ETF bandwagon as if ETFs are the savior of the investment world. Look at the highlighted section again and tell me this: Say, you had invested in mutual funds last year and lost 40.5%, while your “smart” neighbor had selected ETFs and “only” lost 39.1%. Do you think that he’ll be much happier than you are?

Of course not! The question, as I pointed out many times, should not be which one is better, but how you use these tools. There are times when mutual funds outperform ETFs and vice versa. Accept it and live with it. Using both in conjunction with my trend tracking methodology will allow you to select only those that are most suitable at the moment you are deploying assets in the market.

Trying to simply favor one tool over another without a clearly defined exit plan in place will only lead to uncontrollable losses as history has shown over and over again.

Yesterday’s post about my new e-book “The SimpleHedge Strategy” prompted a lot of inquires. Reader Dick had this to say:

Thanks for sharing the Hedging e-Booklet. I think the approach is brilliant, and just whatI needed. I have a question though: You talk of a short-term trend line, but I don’t see itbeing replicated, either at your blog or the Trend Tracker site.

Am I missing something? If it isn’t being currently shown, then my obvious suggestion is that you begin to show it atone/both sites. Another suggestion would be to add a subsection called “hedging” to your other categories that you display (i.e., Domestic Funds, ETFs, Sectors, etc.).

That’s the exact plan. Things were a bit hectic leading up to the completion of this e-book, so I neglected to mention the upcoming additions to the weekly commentary and StatSheet.

First, the weekly update, which now features the positions of the domestic and international Trend Tracking Indexes (TTIs), will as of next week also show the position of the (short-term) Hedge Trend line. This will look as follows and is based on last Friday’s close:

Domestic TTI: -12.28%
International TTI: -20.89%
Hedge TTI: -5.40%

Second, whenever I display a chart of the domestic TTI, it will feature the long-term trend line (red) and the short-term trend line (blue) just as shown in the e-book.

Third, starting with next Thursday’s StatSheet, I will add a section titled “The SimpleHedge,” which will show the latest update on the active position, which I have featured in the book, so you can see how it plays out.

As shown above, the Hedge TTI is currently in negative territory by -5.40%. That means I will hold my existing hedge subject to my sell stop, but will not add any new ones until the short-term trend line has been crossed to the upside.

For about the past year, I have been working on finding a way to improve my trend tracking methodology by researching ways to enter the markets earlier than as per the usual trading rules. At the same time, however, I wanted to be in control of downside risk.

As a result of my research, I am pleased to announce the details in “The SimpleHedge Strategy,” which can be downloaded for free. This e-book was almost completed last June when the markets collapsed, which prompted me to delay the publication. It was too good of an opportunity to apply these adverse market conditions to the SimpleHedge to see if it could withstand the rigors of the market place.

To me, the answer is a resounding “yes,” but you’ll be the judge to see how not only this simple approach can stand on its own but also complements my trend tracking strategy, which I have advocated for over 20 years.

Certainly, this e-book will generate a lot of questions and comments. Feel free to either post them or send me an email. I may not be able to respond directly to all inquiries but will attempt to post the relevant questions along with my answers.

This is a work in progress, and I expect to make updates and revisions as new opportunities present themselves over time.