Double Click on any Image for a Full Size View

I’ve annotated a graph of the S&P 500 to give you an idea of what I see happening to the market.

If you’ve been reading the blog and the recent posts since I warned that we were getting ready for a pullback, you will recall the solid blue trendline that I said was important.  You will recall that I posted when we broke below that line last week.  Today, we have decisively dropped beneath it (making it now overhead resistance to a recovery to previous highs) and we have an intraday break of major support (horizontal black line) at 3363 on the index based upon previous trading activity.

What you want to watch for today is:

(1) whether we can stage a rally and close above 3363 ( that would be positive and an indication that buyers have begun to emerge from the sidelines and put money to work).  This could set the stage for an assault on the blue trend line and a return to previous highs; or

(2) whether we continue to deteriorate and close below 3363 (that would be negative and an indication that the sellers are still in charge and further downside is likely).  This will set the stage for a move to test the 50 day moving average and further weakness to the 200 day moving average line at 3093.

I’ve also added two key items that indicate number two above is possible:  (1) rising volume on down days in the index; and (2) volatility is rising toward highs seen in May.

We continue to pick our spots to book profits in holdings so we have cash to reinvest once we see a market turn.

Before ending I wanted to provide some color commentary.   I had an email from a reader wanting to know why we don’t just sell everything when the market looks like it is headed lower.  It’s a good question.  The answer is that even if the indicators say that market is headed lower, we are dealing with human emotions and psychology.  I’ve written on this blog in the past that the graphs are really just visual ways to understand the human psychology of the markets.  You can see the emotional turns when the markets move up and down and the indicators we follow are measures of those emotions in the form of price and volume.  Because we are dealing with emotions, plus the added impact of a 24 hour news cycle, the indicators tell us where we are where we are most likely to go subject to nothing being reported in the news that investors find surprising.  Because of this, it is not prudent to make a big bet like selling everything, particularly when our news is so full of surprising things at the current time.  The better move is to incrementally buy and sell, building or deploying cash over time, in order to outperform the market.

—Mark