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S&P Keeps Going and Going


The index is building support as it "rests."


Editor's Note: This article was originally published on the Buzz & Banter. It's being reposted here for the benefit of the Minyanville community.

Yesterday, the S&P 500 found support close to its recent highs that we have discussed on the Buzz, and immediately rebounded from there.

This expected choppiness has been why I've been quite vocal about playing the market indexes from the 'long and no-long (cash)' sides, rather than the 'long and short' sides. Nimble traders and pros can take advantage of declining individual stocks, but to switch sides at a moments notice remains tough for most active investors.

And yes, looking at it from the point of view of Alexander's invasion that we discussed yesterday, if the market 'rests' at these 'conquered' levels without giving much way, it's learning valuable lessons from history. (See this Buzz from August 27.)

1. The longer the S&P 500 'rests' at the current levels, the stronger the support offered by the levels that we've often discussed on the buzz will be (1012 and 950 area) and the more real the possibility of a blow-off move; a buying stampede into upside levels that I alluded to on August 13 and August 24.

2. As you witnessed yesterday, buyers are waiting at every support. Notice also, the magnitude of dips bought is becoming smaller and smaller -- now an intraday decline of 1% is a 'dip that's bought'!

3. Previously forgotten, underperforming, small stocks are the 'hottest buys' now, without any regard to quality. That is certainly a sign of froth, a signal that the rally is on its last legs.

Logically, it seems that the move is already living on borrowed time; after all, with bullish sentiment ripping to highest levels since December 2007, everyone who wanted to be bullish probably is.

During the past week or so, as many percentage points of the market moved, my mailbox has been full of reader notes lamenting on the 'lack of logic' behind the move. But emotionally, the line between rationality and irrationality could be blurred, as we just discussed. Reminds me of J. M. Keynes words: "Market can remain irrational longer than you can remain solvent"

Let's consider how far this rally could logically go (even if many people consider this huge move off the low, illogical to begin with) -- for that, here is an excerpt from the Buzz note on August 24:

"On August 13, I had shared some thoughts about potential higher targets on S&P 500, Nasdaq and Russell 2000, coinciding with their longer term downtrend lines. Here's the chart of S&P 500:

Click to enlarge

Here's another look taking into account Fibonacci retracement levels. Now that the market is at 38.2% retracement level (after having cleared the initial 23.6 % retracement level) a breakout here might lead it to the 50% retracement, just around 1120 on the S&P 500.

Click to enlarge

Last week I shared several thoughts on why I'm not shorting the market indexes yet; in my world, new highs are usually not a basis of short-selling, unless accompanied by a blow-off situation or followed by a serious blow (like the LTCM debacle) to make such highs vulnerable to a sudden decline."

Can today be part of that blow-off move? After all, it's coming on the heels of the Dow being up for eight consecutive days. I'd be on the lookout for a 90%-down day and the behavior of the major market indexes at technically important support levels to assess the start of a much-needed correction.

I came across this Reformed Broker article, which might explain the market action in a more-colorful manner. (See "The Five Stages of Panic Buying"). Who said emotions are not valuable in this equation?

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No positions in stocks mentioned.

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