Writing the Obituary for the Stock Market
Is it too early to write the obituary for the stock market?
Today the S&P 500 closed under 1,040 – the major line in the sand between bulls and bears.
Let’s take a quick look at this development and why this level is so important to monitor – we’re all watching it.
The Break:
.
On the S&P 500, the key level of final support in the rally that began March 2009 rested at 1,040.
Traders/Investors tested (supported) this level four key times, starting with the February 2010 low and moving to the two successful tests in May and June 2010… which gave way to today’s failure for support to hold.
I heard a great quote on CNBC yesterday referring to this level:
“The greater authority of a price level, the more authoriative the break.”
What that means is that everyone from amateur chartists to professional trading experts referenced the 1,040 level as a very important price level to monitor on their charts.
Today, that level broke definitively.
Let’s pull back our perspective to see the importance of this reference level.
First, the S&P 500:
You can see that this support zone goes beyond the February 2010 low – stretching back to serve as support in October and November 2009 as well.
There is no further support on any timeframe for the market in terms of moving averages.
Let’s see the Monthly Chart:
Price officially closed – for the first time I might add – under the 200 month SMA, and because today is the last day of the month, this break and close is now official and permanent on the chart.
The 200 month SMA for the S&P 500 rests currently at 1,048.
From a classical definition, today officially marks the birth of a new downtrend in the market using all metrics available.
1. Price has formed a series of lower lows and lower highs
2. Price is under the 20 and 50 EMAs on all timeframes
3. The daily EMA structure has taken on the most bearish orientation possible
4. Price has taken out a significant final support line
For reference, the key final support levels to watch in other indexes include:
Dow Jones: 9,800 (today’s close was 9,774)
NASDAQ: 2,125 (today’s close was 2,109)
There is one caveat to note, just to be safe from a ‘cover all angles’ basis.
We had a similar situation in July 2009 where the market broke under an important key ‘line in the sand’ at the 875 level, which officially broke down from a clear head and shoulders pattern.
The break failed horribly and gave rise to a new bull phase that spanned from July 2009 to April 2010.
The difference? We did not CLOSE under that reference level as we did here today.
The reference is 1,040 – as long as we are under that level, technical analysts must officially declare the market in a downtrend.
In the event we break and close back above 1,040, we can expect a massive rally similar to that of July 2009 due to “Popped Stops” from all the investors and traders who liquidated and/or shorted the market while it was under 1,040.
Barring that potential – of a close back above 1,040 in the next few days or weeks – we can expect lower index and stock prices ahead, with a minimal likely target being the aforementioned July lows near the 875 level.
I’ll discuss this and more in this weekend’s special update Weekly Report.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade
I guess it wasn't an inverse head and shoulders 🙂 A rounded reversal that happened very fast…too fast…and everyone had their stops under the day's lows.
What about yesterday's gap?
Right – that's why these levels are important. Everyone watches then and everyone responds to them so a large part of the move is a self-fulfilling prophecy, but that only makes the level more significant.
Not only were many stop-losses there, but the average investor may have decided “I'm going to remain holding my mutual funds unless we close under 1,040” and today some of them called their brokers and said “Sell everything.”
And of course, the bears likely put on large short-sale positions.
The market will need CPR to get back above 1,040, and if it does, then the dynamics shift strongly to the bulls.
If not, then like it or love it, we're very likely to see 875 before long.
And 875 is also the measured move from the head and shoulders pattern as well as 68.1% retracement of the March 9th rally.
Are you holding short now as a swing or position trade?
Not all gaps have to filled. It's a common myth that all gaps must be filled.
That's right – lots of reasons to find confluence support – and thus a price target – at 875.
Depends on your aggression level – if you believe this is the break and believe we'll see 875, position your account accordingly.
If the bulls don't turn alive in the next few days we'll also have the “death cross” for the S&P. Just another sell signal for long term holders to throw in the towel.
Right.
I feel like the gap holds no significance at all here, given the dynamics of the official shift to a new bear market.
Right.
I feel like the gap holds no significance at all here, given the dynamics of the official shift to a new bear market.
The sole reason the “market ” turned in July of '09 was QE, and the prop desks. QE 2.0?
That's still on the table – any push back above 1,040 is likely to result in a similar vicious stop-loss/short-squeeze to the upside like in July.
Exactly.
I follow EMA charts so we already have the death cross in the daily EMAs.
Others who watch SMAs – probably more people – may react to that.
hey corey — check this out
check out the every mid-july period going back 5-6 years and note how that time period majority of the time coincides with a major top or bottom, right around the beginning of earnings season
This is all garbage!
Thank you John. That is something I will look into.
You write, in the event we break and close back above 1,040, we can expect a massive rally similar to that of July 2009 due to “Popped Stops” from all the investors and traders who liquidated and/or shorted the market while it was under 1,040.
The market rose beginning in July 2009 due to the Federal Reserve QE, the effect of which basically ended April 26, 2010 when the currency traders went massively short the world currencies against the dollar. So lacking the kind of massive incentives and assurances, I am not enthusiastic for a trading theory based on popped stops.
I wrote today in the EconomicReview Journal that the Google Finance chart of DBB, EWU, DIA, EWJ, JSC and IWM shows that Global Growth ended April 16, 2010 on China credit tightening when the currency traders disinvested from base metal carry trades causing the UK shares, EWU, and Japan Shares, EWJ, to fall in value. Debt Deflation commenced on April 26, 2010, as currency traders sold the world’s currencies against the US Dollar causing the financially sensitive Russell 2000 IWM, shares to fall in value. The Japan shares, EWJ, had been outperforming the Dow, DIA, up until April 26, 2010; now they are running neck-and-neck. The currency traders in going long the Yen and short various currencies has led to the Japanese Small Companies, JSC, having better performance, albeit in a downward projectory, than the Dow, the Japanese shares, the UK shares and the Russell 2000.
Since April 26, 2010, the currency traders unwinding the euro carry trade, the aussie carry trade, as well as others, have caused great rewards to those short with the ProShare Bear Market ETFs:
200% short base metals, BOM +51%
200% short Russell 2000, SJH, +41 Gains have come as the financially sensitive small cap shares have fallen hard on contagion coming into the financial sector from the European Sovereign Debt Crisis, the fall of the too-big-to-fail institutions, RWW, and the regional banks, KBE, as well as from the widending spread between the corporate bond interest rate and the ten year US Treasury Note yield.
200% short Basic Materials, SMN, +40%
200% short Industrials, SIJ, 38%
200% short oil, SCO, 37%
200% short Semiconductors, SSG, 36% Semiconductors always fall lower quickly, immediately before or immediately after a market downturn.
200% short Nasdaq Biotechnology, BIS, 33% Investors have taken flight from these once “crown jewels of investing” and “holders of scientific promise”.
200% short Asia excluding Japan, JPX, 29%. A lot of yen carry trade investment has come out of hot growth Asia countries and out of financially and basic material laden Australia.
200% short Japan, EWV, 24% The loss in the Japanese shares reflects ongoing deflation in Japan and currency losses on international trading.
200% short Europe, EPV, 23% European shares have fallen significantly on contagion spreading into the European Financials, EUFN, from the European Sovereign Debt Crisis.
The world shares, ACWI, entered into Kondratieff Winter on April 26, 2010.
Over the last six months, investors have sought so called safety in US Tresuries, IEF, TLT and ZROZ.