Thursday, January 20, 2011

selling pressure

A couple of days ago I explained why I thought the 1290 level would be strong resistance. During the past couple of days sellers have shown up in force and the market has been expanding its daily range as it has dropped. I suspect that that 50-75 point break I have been expecting for the last month has started, but it would take a Friday close below 1258 this week to convince me.

If that break is indeed underway it pays to start thinking about where it might end. There have been two previous reaction since the July 2010 low at 1010 in the cash S&P (daily chart is above this post). The first was about 90 points in length (first dash blue rectangle) and the second about 55 points (first solid blue rectangle). If this reaction turns out to be as long as either of those two preceding ones it would end either at 1245 or at 1205.

This is still a bull market. The average is well above its rising 200 day moving average (wiggly red line). In a bull market substantial reactions typically drop the market to or somewhat below its 50 day moving average which currently stands at 1237 (red arrows).

I have also drawn a doubled trend channel from the July lows (green dash lines). The rally stopped about 10 points shy of the upper channel line which stands now at 1305. A drop to the middle line would end around the 1215 level.

Note that there is support at the November top at 1226 (purple dash line) and at the April 2010 top of 1216. My guess is that the market will have a hard time dropping below either of these levels.

All of these considerations suggest that if this is the break I have been expecting then it will end somewhere in the green target oval I have drawn.


Bill said...

Too early to tell but the british FTSE 100 already broke today its November 2010 high (set on November 9). I expect the S&P 500 to follow suit shortly which means it'll go below 1225. The american market is right now two weeks behind Europe, where drops of 1% or more started in early January.

This drop will at least revisit the November lows in the 1170 to 1190 range. Anything less than that would fail to shake off the bullish sentiment that is right now entrenched in the market, and no meaningful rally will ensue until we go below 1,200.

Even if we compare this drop to the one in January 2010 a year ago we are looking at a 120 point drop. And both corrections started around the same date.

I believe the 50-day moving average is not a good indicator to use this time in order to find resistance, since the last 50 days is what really got the market into overbought territory and there were no down days pretty much.


Nav said...

Thank you for the great read like always.
SP500 cash breaks under the 1280 support zone (this was also the 10day MA); the next level at 1278 was sliced through as well. The next support zone to watch is 1262.
@carlrealtime is so helpful,Sir!