While everyone is worried about the invisible line that is the 200 day moving average (see here), today the S&P500 is actually breaking real levels. Last week the S&P broke below the uptrend line from the important 2011 lows. I remember those lows like it was yesterday, and we’ve broken that uptrend. But today we are now below the uptrend line from 2009 for the first time.
Here we’re looking at a logarithmic daily bar chart of the S&P500. We pointed to the beautiful failed breakout over 2 weeks ago and we are seeing the result. This is as text books as it gets, which is why on the Wall Street Journal I suggested selling. Guys, this is why we watch out for these types of moves, because the best trades come from them. How nice is this sell-off?
Meanwhile, we also had a bearish divergence in momentum as seen on this chart. All of this said to get out of the way. But here’s the problem. Things have actually gotten worse. Let me explain.
Although momentum had put in a bearish divergence, there was a possibility that it could work itself off through time rather than through price. We’ve seen the S&P do this before over the last few years, which is healthy. But now that we are hitting oversold conditions in our 14-day RSI, momentum is officially in a bearish range for the first time since 2012. This is not good from a structural perspective. Markets in uptrends do not get oversold. They are strong enough to correct without reaching those conditions. This one clearly isn’t.
Moving on, we also broke 2 major uptrends within a very short period of time. This occurred simultaneously as we broke key support from the August lows. You know what this means right? We now have a series of, “Lower highs and lower lows”. Do you know what we call that? A downtrend.
Take all of this price action with what we’re seeing from an intermarket perspective, and the conclusion is to take any strength to sell into it. See Junk vs Treasury Bond ratio and Discretionary vs Staples Ratio.
I think best case scenario we only go down another 200 points in the S&P500.
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Tags: $SPY $SPX $ES_F