Bouncing Downhill in the Technical Landscape
Violation of S&P lows sends markets into the abyss.
In the last Quick Market Note, we highlighted the inverted cup-and-handle formation on the S&P 500 with a stochastic divergence. We noted the potential for a measured move upon breaking the neckline that could send the index toward the 664 area.
As we approach that level, we wanted to take a moment to review the current technical landscape. In our opinion, the short-term sentiment is overly negative, and is setting up the potential for a slight bounce in this area upon completing the aforementioned measured move.
Where could that bounce take us if it were to play out? See the 60-minute chart below. We have a short-term downtrend as outlined, which is the first area the markets need to get through. From there, we have a few gaps following the recent carnage. And of course, the neckline near -800 should offer formidable resistance (should we even get there).
To be clear, in the big picture we remain extremely cautious, as there's a great deal of technical damage that will take a long, long time to repair as we work off extreme speculative and credit-driven excess.
As we also discussed, breaking the 770 level on the S&P violated the 2002 market lows (akin to a trap door), equating potentially to only the second secular bear market in history. This has also sent the markets into what we have termed "the abyss."
What's the punch line then, on the downside? Our work suggests that while we could get a short-term oversold bounce, a move on the S&P that ultimately cuts 620 is likely, and potentially a re-test of the 480 level could be in the cards. See the charts below to see where those key levels are derived from.
Be careful, and good luck.
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