The bearish stars aligned today as the S&P500 continued its pullback and fell below the lows of its last 6 days. A familiar foe of the market returned today as the VIX soared nearly 10% at one point during the day and closed at its best level on an up day since March 6th. Again we saw “macro” sectors lead us lower, with energy and materials leading the way in the wake up oil and copper selling off.
We believe today is simply the extension of what we said had started a few days ago, a healthy pullback.
“…on Tuesday, the S&P500 fell below its prior days low (1,402) for the first time since the most recent uptrend that began on 3/8 started. Thus, a sell signal was generated and it will stay valid Wednesday if SPX remains below Tuesday’s high (what will be the prior day’s high) of 1,409. The last time a sell signal was generated was on 2/29 when SPX was testing resistance around 1,370. What followed was a modest 2.5% pullback to 1,340 which held as support, much like it did in the middle of February (see 2/13-2/16).
Fast forward to the current state of the market; SPX has again generated a sell signal this time as it is testing resistance around 1,400. If this sell signal plays out like the last one, then we could see a pullback to about 1,370 (that would represent a 2.5% pullback from Tuesday’s close of 1,405)...”
-SH @ the bell 3/21/12: S&P500 now on a sell signal
If our analysis turns out to be correct, then this pullback is almost halfway over. What does concern us though is that USO (tracks oil) and FCX (tends to track copper) are both dangerously close to breaking below their lows of the last month. In addition, the 10 year Spanish yield rose to just below the 5.5% level. As we talked about this morning, if this yield continues to rise it will definitely create headline volatility for stocks (some of which we already saw today).
We’re not panicking though, until we are told to think otherwise, we will continue to believe that this is just a healthy pullback after a nice move higher. What would have us thinking different? If USO and FCX fall much further below their 1 month lows, if the VIX continues this advance and tests the 20 level, if XLF fails to find support in the $15-$15.30 range. As a reminder, the sell signal in the SPX which we correctly identified for the 2nd time in as many signals will remain valid going into next week if SPX stays below 1,403 tomorrow.
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- SH @ the close 12/28/2011: SPX loses 200 day sma, VIX spikes
- SH @ the close 10/17/2011: Markets sink as financials takes a dive; VIX soars
- SH @ the close 11/14/2011: Markets pullback in light volume session
- SH @ the close 12/1/2011: Markets take a breather, SPX/VIX flash familiar pattern
- SH @ the close 11/10/11: Markets bounce unenthusiastically