Today will be the first day of the new bear market for the S&P500, joining many other global stock indexes that have been in bear market territory for some time. The psychological impact of such a development is that any bulls who had been holding out hope that the market has put in its lows for the year are now sorely disappointed. These buyers of last resort, if you will, were the only thing keeping the markets from breaking down to their current levels over a month ago. We’re curious to see how the implications of this new bear market will affect those who, up until yesterday, were (or are still are) bullish.
Let’s put ourselves in a bulls shoes for a moment, and assume we’ve been getting long on pullbacks the last few weeks as the markets had held above 1,120. If I was a seasoned bullish trader, I would have taken such positions under a premise that I will stay long as long as the market stays above level “X.” Our level would have been 1,100 (the August low), and 1,090 at the absolute lowest (a 1% move below 1,100). Say for instance we didn’t get stopped out yet, because we wanted to see if maybe, just maybe, the market was faking out to the downside only to bounce, what would my strategy be? We would wait to see if SPX could get back towards 1,120 then we make a new decision. If it were to stall out, we would exit our long positions because the fact it couldn’t break above previous support would be really bearish.
Such is the scenario that we think will play out and is why bear markets are such a vicious cycle lower. Any bulls who had been helping support the market, quickly change their minds and join the bears as they attempt to limit their losses from being on the wrong side of the market. Watch closely to see where SPX finds new resistance, if the recent series of lower lows are any indication, any rally to come will likely stall out somewhere between 1,120 – 1,150. As for support watch the 1,190 level first and then 1,065-1,075 below that.
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