Technical Talk: Where will the S&P 500 find support?
The comments below were provided by Kevin Lane of Fusion IQ.
As shown on the graph below, the last two weeks have seen the S&P 500 Index break its lower channel line (orange lines), intact since the March 2009 lows. Clearly the turndown is still well, well off the lows and thus we still believe this is a correction and not another major market implosion. While a minor bounce may occur after the last few days of selling, given the magnitude of the previous advance, a correction in the order of 8%-12% is likely. This correction would help wipe out some of the price excess and remaining bullishness.
That said, sentiment, which in our opinion has been the best way to call this market over the last six months, still remains far too skeptical and negative for this to be anything more than a correction. So, although the selling has been broad based of late and internals such as momentum and breadth have weakened slightly, they still appear to reflect correction conditions and not something greater. The question we are now trying to answer is where can the S&P 500 find some support and stabilize?
Unlike the previous six months where dips were bought, rallies are now being sold. With sellers more aggressive and buyer interest waning at these levels, we believe equity prices need to go lower before they ultimately go higher. There are two levels that are on our radar for potential support: 1,036, followed by 1,000. Both represent retracement levels from the previous up-move. The lower level in a perfect world would create a larger pool of negative sentiment (a bullish condition), a more favorable entry point from a valuation standpoint and give investors with sideline liquidity a new opportunity to buy into the market.
The one thing we continue to watch very closely is 30-year bond yields, which are just below a key multi-year downtrend line near 4.83 %. A move above that could cause more havoc for equities. Stay tuned for further updates. For now the defensive team remains on the field. We suggest during this period you honor your risk management plans as sometimes these corrections can be very painful for individual holdings.
Source: Kevin Lane, Fusion IQ, February 1, 2010.
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