With the S&P; 500 support level of 1,040 having been decisively broken, the question some readers had is: Where is new support coming in as we enter bear market territory?
Miynanville tried to shed some light on that question in “Why We Should Be Talking About S&P; 840:”
With the magical 1040 level being tested in the S&P; 500, many technicians and talking heads are looking at this level as the final step before Armageddon. Running through the various newsletters and blogs, a common theme seems to be that if 1040 doesn’t hold, then the 960 level is the last stand before traders get a one-way ticket to test the March 2009 lows of 666. From that point, it’s death and destruction to the American economic system as we know it, or so the naysayers would have you believe.
From my perch, as a money manager and daily commentator in various media outlets, I agree that 1040 holds a lot of psychological weight. If a break of this level holds, it should turn many market participants fully bearish and cause a downward cascade that will be difficult to stop. The proverbial line in the sand has been drawn,and the S&P; is clawing and scraping at this very moment to remain with its head above this low water mark.
Trying to stay two steps ahead of the action, I roll out the weekly charts to anticipate the next areas of support. I’ve marked several areas on the weekly chart below that have been battlegrounds in the past. No, these aren’t Fibonacci retracements but merely areas where the action stalled as traders, investors, and mutual funds jockeyed for position.
The first two months of 2009 would have been the first time traders might have taken note of how much air time 840 was receiving. Prices seemed to be drawn back to this area like sheet metal to a magnet. When selling pressure resumed and the S&P; hit its eventual bottom at 666, 840 was the last area of consolidation. In textbook fashion, 840 once again was an area of consternation and tight play as the S&P; bounced off the lows. From there, there was no turning back as the S&P; raced to 1200.
Now turn your eyes back to the weekly chart for a bigger-picture view. 840 and 960 may never come into play as the markets could catch a second wind and be off like a racehorse. But if 1040 does relinquish control to the bears, then all eyes will be fixated on the next levels of support. It’s my opinion that 840 should be added to the discussion, and that 666 isn’t inevitable as we struggle for footing. 960 to 666 is a long step off the end of the plank, but my bet is on 840 being a safety net. So yes, I’d be a buyer of the S&P;… at 840.
There you have it. From 1,040 to 960 to 840 to 666, these are the numbers to watch for, if the bear has its way. This is not a prediction that we will actual get to the bottom, although the possibility exists, but merely a demonstration of where the support levels are located.
Every level can serve as a springboard to renewed bullish action, but if broken, it will confirm the bearish scenario. With the market having closed at 1,023 last Friday, personally, I will be watching the 1,000 level. Not that it has any technical significance, but it does have a psychological one. I believe once that has been pierced to the downside, we will get to 960 in a hurry.
Of course, positive economic developments, along with a rip-roaring upcoming earnings season, can reverse this current bearish direction, but I doubt it. It may take a lot of zigzagging, but I think the die has been cast, and the major trend will be south.
Whether I am right or wrong does not matter, what matters is that you protect yourself from the increased downside risk via my recommended sell stop discipline.
We may not see a repeat of 2008, but slow and consistently sliding prices will have just as bad of an effect on your portfolio as an outright crash.