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S&P 500 Could Break 1996 Lows


If 770 is breached, the drop could be sickening.


As discussed in the last 3 or 4 articles, the S&P 500 (SPX) defended and closed above its notorious 850 support level 9 separate times in the last month and a half. The technical and contrarian action indicated the probabilities lay with a short-term base being built and a subsequent bounce up toward the third quarter's close (1,150 or so).

However, the SPX just couldn't hold any further investor uncertainty, and the improbable became reality.

Yesterday, the SPX breached my firm's risk level and closed at 806; a yearly (and 5-year) low. Whether it was economics and employment, fundamentals and the "Big 3," governmental table-pounding and the constantly "morphing" TARP (Troubled Asset Relief Program), or all the above, that defined risk threshold was surpassed.

This technical action, in my humble opinion, changes the short-term market dynamics. This is not to say the market won't go up from here, but I now believe there's a higher probability of a bigger drop than of a potential advance at this juncture.

Hence, investment prudence dictates the long positions my firm put on throughout the bottoming process of this latest technical base, since the end of the third quarter, be relinquished; we returned to a defensive stance. We were willing to take a certain amount of risk given a calculated reward. This no longer holds true.

As they say: "Fish or cut bait."
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No positions in stocks mentioned.

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