What's Wrong With the S&P500?

Long time readers know that we're not in the business of asking "why". As market participants, knowing "why" never pays us a dime - never has, never will. The answer to the question "why" is for sell side fundamental analysts, economists and the media. They get paid to come up with reasons why. But remember none of them are direct market participants. They have other objectives: sell research, sell tv commercials, etc. And that's great; that's their business model.

As market participants, people who actually buy and sell assets, our main focus is on what, when and for how long. Worrying about "why" is a waste of time for us, because as I mentioned earlier, that has never nor will it ever pay us a dime. For us, it's all about risk/reward. Where can we allocate the most money where if we're wrong we lose a little, but if we're right we can make a lot?

Coming into the year, the question of whether there was a good risk/reward in the S&P500 was clear. The answer was No - see here here, here and here. It just wasn't there and there wasn't any reason to force it. Quite the opposite in fact; the risk/reward was and has been in favor of the bears.

Here is the chart I've been looking at and sharing with you guys all year. It's very simple. The peaks in prices since 2010 line up right to the highs and the 261.8% Fibonacci extension from the last correction in 2011 gave us the exact same price target.

So what's wrong with the market this year? Nothing. This looks perfectly normal to me. And we probably have some more downside left. It looks like another 50-100 points in the S&P500, and it all seems like typical market behavior.

I would still be selling any rallies. All of these broken support levels 1810 and now 1770 should turn into some resistance on any rally attempts. This market is technically broken in the short-term. We no longer have a series of higher highs and higher lows. We now officially have a series of lower highs and lower lows, which is the definition of a downtrend.

At best I think the market goes sideways for a while. But in reality, we're likely to see lower prices throughout the first quarter. And this is normal. Don't blame GDP growth or earnings multiples or the economic data of the day that headline writers love using to justify daily market moves. This is a normal, conventional sell-off coming from very clear resistance levels. There's nothing "wrong" with the market.

Tags: $SPY $SPX $ES_F