The market has Larry McMillan looking in both directions now. From the free Option Strategist Weekly Updater (sign up here):
Last Friday, after a unanimously- agreed-upon positive Employment Report, $SPX traded to a new nearly 5-year high. But then, selling developed, and the market collapsed that day — completing a negative intraday reversal. After temporizing on Monday, more selling swamped the markets on Tuesday, and that was the day that plunged $SPX below the support levels at 1290-1295. That area continues to be a demarcation line. Even though the selling stopped as the holiday weekend approached, we would expect the bears to make further downside attempts soon. The $SPX chart not only shows a breakdown, but the 20-day moving average has rolled over, near the 1300 level, and is trending lower as well.
The over-riding question, though, is ‘Will this just be another false breakdown?’ As we’ve repeatedly noted, this market is historic in its failure to follow through on breakout moves (witness the false upside breakout last Friday). So now the onus is on the bears to produce. We should know rather quickly — early next week — if they are up to the task or not. Our guess is they will be.
In summary, the indicators are more negative than they had previously been, but they are not uniformly on sell signals. The best thing to watch right now is how $SPX performs: it’s bearish if it continues to close below 1290, it’s neutral between 1290 and 1300, and a close above 1300 would indicate that — once again — a false breakdown had occurred.
