Thursday, May 06, 2010
Here is a daily chart of the cash S&P 500 showing its 50 day moving average (blue line) and its 200 day moving average (red line).
From 2:30 pm to 2:50 pm today the ES dropped from 1131 to 1056, about 7% in twenty minutes! The range for today (thus far!) has been 112 points, about 10% from high to low. At the 1056 low a short while ago the market had dropped 13% from its 1216 high with most of that drop coming in a couple of hours this afternoon.
To put this down swing in perspective recall that the two biggest drops since the March 6, 2009 low at 666 carried the ES down 9.2% each. The first carried 90 points and the second 107 points. This latest drop has been 13.2% and has carried the market down 160 points from its 1216 top on April 26.
What now? I still think this is a bull market. Indeed, a down move like this one that develops such panic selling so soon after the top is characteristic of a bull market correction, not the kickoff of a new bear market. At today's low the cash S&P was well below its rising 50 day moving average and a little below its rising 200 day moving average. This sort of configuration is normally associated with a buying opportunity in a bull market.
As I was writing this post the ES rallied from its 1056 low back to 1131, a 75 point move again in only 20 minutes. Taking history as a guide I think the market will take a few days to stabilize, but I doubt that it will again get anywhere near the 1056 level. I would guess that the 1080-90 level will now be support.
The next big swing should be another bull market up leg. This means that it will carry to new highs above 1216 and probably into the 1250-1300 zone.