Thursday, February 24, 2011
Here is a daily chart of the cash S&P over the past 18 months. The red line is the 200 day moving average and the blue line is the 50 day moving average.
We have just seen a substantial, 3 day break and the question is whether or not it is just the first stage of something bigger. It is hard to tell at this juncture because the at the moment the S&P has not even matched the size of the drop of last November (blue dash rectangles). Thus the rhythm of the rally from last July's low at 1008 has yet to be broken. The S&P can drop as far as its 50 day moving average (red arrows) near 1287 without breaking this rhythm.
If a bigger drop is indeed underway then I think it will be similar to the January-February 2010 break. That correction carried the S&P nearly 70 points below its 50 day moving average. A similar drop now would end near support at the April 2010 top (purple dash rectangles and green dash line).
I can't guess which of these alternatives is the more likely. But I am confident that new highs for the bull market will be seen once this correction is complete.