Friday, August 19, 2011

Market Watch:SPX

Well it is still forming, the double bottom on the SPX I mean. Look at the 1250 level in the chart you can see the strong support that it provided right up until the beginning of this month. Once it broke that support it crashed 150 points in no time at all. Then it found support finally at 1,100. What's important to understand is that buying did not come into the market at 1,100 rather shortselling stopped there. Think about us. We had sold short the SPX at 1,160 and had to buy the shares back at 1,121 in order to close out our position. Once all of the short covering dries up, the shares are left to fall again. So, it was primarily short covering that drove the SPX backup to the 1,200 level. Yesterdays pull back from that level was no surprise to us. I still expect the pullback to continue down to the 1,100 level before the new money and real buying comes in.

Of course there's no law that says buying can't come in right here, but look at the stochastic it has just turned over and has plenty of room underneath. In fact I wouldn't be surprised to see the index come all the way down to 1100 before rocketing up at least two 1,250.

On the other hand if the SPX breaks through 1100, then all bets on the long side are off. In that event it looks like 1050 would be the next decision point. But we are getting ahead of ourselves. Right now just keep your eye on the action between yesterdays close and 1,100.

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