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The Single Most Important S&P 500 Level


Over the last dozen years, the SPX has crossed, retested, and breached this level 12 times.

"Horrid" then "great" is how the pundits' headlines have portrayed the last two weeks of the market; sensationalism at its finest. No wonder investors get confused. So which is it? This type of melodrama epitomizes some of the reasons why investors have become so frustrated over the last decade plus. To make it easier to comprehend the confusion, let's step back and ask a simple question: What do these dates have in common?

June 4, 2012
December 31, 2010
March 17, 2008
September 8, 2008
May 24, 2006
November 22, 2005
May 16, 2001
February 2, 2000
October 15, 1999

Answer: The S&P 500 Index (SPX) closed at ~1,260. Over the last dozen years, the SPX has crossed, retested, and breached this level 12 times, depending on how it's quantified.

Click to enlarge

When adding the melodrama and sensationalism, Wall Street scandals, global tensions, political finger-pointing, misappropriation of funds, struggling economics, quantitative easing, and the US' skyrocketing debt load, it can become somewhat overwhelming to ascertain potential direction. It's the whole "forest for the trees" idiom. My firm believes that no single individual or institution has the mental capacity, intellect, or quantitative ability to comprehend the amalgamation of all global fundamental factors to derive a meaningful conclusion about the general direction of the market without employing the demand factor, or better said, the law of supply and demand.

By understanding that it will most likely get worse before it gets better, it's important that investors -- institutional and individual alike -- take a step back and look at the big picture on a technical risk basis. Technical analysis provides clarity and a better understanding of risk and potential market direction, which can help alleviate a great deal of the daily/weekly noise. Realize that market direction accounts for ~70% of the returns within a portfolio.

This week, not unlike the past few, will be filled with volatility and confusion. Today it begins with the Chinese economic news which hit over the weekend and it will end with the anticipation of the Greek election and many pontificating on whether or not it means an exodus from the EU. However this ends (and from whichever direction the pebble/stone/boulder is tossed into the pond), it will bring quite a wave of ripples to both the debt and equity markets. As such, investors have to ascertain one thing and one thing only: Where's the risk?

Click to enlarge

Since breaking the short-term trend on May 5 at 1,360 the SPX has vacillated between 1,330 and 1,270, a 60pt/~5% range. In doing so it's created a small double bottom having a stochastic divergence – a positive sign. If the neckline at ~1,330 was to be breached with volume, the next likely area would be around the 1,360 -1,370 level as shorts cover and bulls begin to hope for QE3. However, if ~1,330 were to remain intact and selling begin to take hold, the bottom of the recent range would be in question (~1,270). If this was to give way, 1,200 looks to be the next support for the general market.

At this point there is not enough evidence for either determination or to take a definitive stand. Until more information is provided it can be likened to flipping a coin. With all this being said, the longer term direction also remains indiscernible due to the recent selloff and its undeniable inherent power -- volume. Hence the proper assessment is: Risk is high and clarity is murky at best.

We hope this helps and finds you well

Editor's Note: Read more at Tesseract Asset Management.

Twitter: @TAM_News
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No positions in stocks mentioned.

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