Technical talk: S&P 500 – expect retest sequence

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The comments below were provided by Kevin Lane of Fusion IQ.

As seen on the weekly S&P 500 Index chart below (with closing prices as at 7/7/09), the Index recently slammed into a convergence of resistance and a downtrend line (red and green lines). After needing a near 44% rally from the lows just to trade up to the aforementioned resistance area, it was hard to imagine the S&P 500 would just blast up through that level.

Add to the mix the fact that we recently entered a period that is historically weak for stocks and it makes sense why prices have corrected of late. As we have said a few times recently, the Index has most likely reached its high point for a while and is likely at best to trade range bound or realistically lower for a period of time.

We also suggested and continue to suggest that stops on remaining long holdings be adjusted/tightened and long exposure be reduced for the time being. Since the dawn of the markets most, if not all, bottoming processes have had some kind of testing process after setting an initial low. In 2002, for instance (our most recent low prior to March 2008), the S&P 500 tested the lows on three separate occasions (red arrows) before the final lows were ultimately set. So, to expect things would be different this time doesn’t make much sense.

There will be short-term trading opportunities that present themselves during the remainder of the summer and into the fall; however, we don’t see any directional bull trend re-establishing itself before some kind of retest sequence. The only thing that would change this outlook is a high volume move on strong internals back above the recent highs.


Source: Kevin Lane, Fusion IQ, July 6, 2009.

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2 comments to Technical talk: S&P 500 – expect retest sequence

  • Thomas Bach

    I am sorry, but Kevin’s (and most other trader’s) almost religious believe in “re-testing” is silly.

    This recession (credit crisis and financial panic) is much more similar to The Panic of 1907 than to 2001 (post the Dot-com bubble and 9/11) recession.

    (The Panic of 1907, also known as the 1907 Bankers’ Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell close to 60% from its peak the previous year (very similar to 2008). Panic occurred, as this was during a time of economic recession, and there were numerous runs on banks and trust companies. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered into bankruptcy. Primary causes of the run include a retraction of market liquidity by a number of New York City banks and loss of confidence.)

    There were NO re-tests in 1908 or in 1909.

    Why should it be different in 2009?
    “So, to expect things would be different this time doesn’t make much sense.”

  • Frank W

    Maybe so, Thomas, but a number of very cluey analysts think the bottom of the market is around 400 on the S&P 500. Actually, there is potential for the bottom to be much lower than 400. This financial crisis is, in my opinion, far from over. Indeed, it has hardly begun. The banks and insurance companies that are too big to fail are still carrying tons of packaged loan garbage, and here we are going into another two or more years of mortgage resets.

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