It's Hammer Time For S&P 500

05/07/10 10:09:10 AM

by Donald W. Pendergast, Jr.

Trend reversal? What trend reversal? This is another "buy the dips" pullback, right? Think again.

Security: .SPX, SPY, ES
Position: N/A

If you haven't been trading for more than seven years or so, then you probably haven't lived through a single-day move like this one — ever. In little more than two weeks, the Russell 2000 went from 745.00 all the way down to 629.20, with more than half of that 115-plus point range coming in a single day, May 6, 2010! Sure, the index closed up above 667, but all in all, an intraday move like this is almost unheard of in the major stock indexes, with the exception of the trading days surrounding September 11, 2001, and October 19, 1987. The Standard & Poor's 500 has fared little better than the R2K, however, and since that is the big kahuna among the US stock indexes, that will be our focus for this brief analysis of the current technical state of this wounded giant.

FIGURE 1: S&P 500, WEEKLY. Trend reversal? Indeed. The February swing low at 1044.50 is the line in the sand for this major index; a sharp drop beneath will be very bearish indeed, with 1010.00 being the next major support level.

Graphic provided by: MetaStock.

While it's entirely possible that this key large-cap stock index will soon right itself and start flying high again, the image projected by this weekly chart (Figure 1) seems to imply further weakness ahead. Obviously, the most prominent feature on this chart is the incredible range of this week's bar (with another day's action to come, no less); so far this week, the index has covered the span from 1205.13 to 1065.79, more than 139 points in just four trading days. If this isn't the confirmation of a major trend reversal, then I don't know what else could possibly convince investors and traders.

As far as various support levels go, the .SPX has already violated the first significant Fibonacci confluence zone (derived from the swings emanating from the March and July 2009 swing lows, respectively) by a meaningful amount, although it has managed to closed above that level (near 1085.00) for the moment. Interestingly, Thursday's plunge also saw the index take out the 50-week exponential moving average (EMA)(blue line on chart); again, the index recovered about half of Thursday's maximum intraday loss, keeping it on the top side of this critical trend-delineating EMA for now. A weekly close below the EMA almost guarantees more follow-through to the downside. As far as internal strength (advances/declines, up/down volume, new highs/lows and momentum) goes, the NYSE and S&P 500 are losing steam at a rapid clip; the internal strength barometer is still above its weekly zero line, so we need to keep a close eye on that as well — a weekly close below that line implies that a new bear market phase will be confirmed.

Friday's session may prove to be especially volatile, what with all that's going on with the European debt crisis, and it's easy to imagine that traders and investors will be loath to hold any new long positions over the weekend. For this reason, if you see a nice rebound rally in Friday's morning trading session, it might be prudent to lighten up by lunchtime, or the market might decide to munch on the remnants of your portfolio as a tasty afterdinner mint. Forewarned is forearmed!

Beyond this week, look carefully and see how the .SPX acts/reacts should it decline toward 1044.50, the February 2010 swing low that launched the most recent, incredible rally. A weekly (or even daily) close below that price is almost sure to unleash a new flood of selling, possibly dragging the index down to the next Fibonacci confluence level near 1010.00. If you've been reading my articles here in Traders.com for any length of time, you know that I use cycle analysis to help project possible time/price support/resistance areas in the Russell 2000 and S&P 500, and as it so happens, the next major weekly cycle low is due to appear within the next month. If the cycle low coincides with the major support near 1010.00, that could be an area for aggressive long traders to monitor their shorter-term timing systems for possible low-risk long entries in quality stocks with attractive earnings growth rates. As we get closer to that anticipated cycle low, the technical picture should become much, much clearer. Stay tuned, as we may be in over the next month or so for the biggest show of market fireworks this side of the Fourth of July. Be prepared for anything — literally — in this crazy, fear- and algorithm gone mad–driven market of money mayhem.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
E-mail address:	lineartradingsys@gmail.com
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It's Hammer Time For S&P 500

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