Weakness at a Line of Support ~ The Risk Averse Alert

Tuesday, September 27, 2011

Weakness at a Line of Support

It takes a lot of guts to be bullish right now! Technically speaking, it is the wrong trade...


Good lord, here at a key line of S&P 500 support since the "liquidity crisis" of 2008 we find $SPX's relative strength (top panel) well poised for further market weakness. After having faded for months at successive new peaks prior to August's collapse, the S&P 500's relative strength presently shows sellers in command, notwithstanding yesterday's short squeeze (banks and financials) and today's CME grease.

Not long ago I suggested the August 2011 low might be tested like the May 2010 low was tested, and in so doing have a similar, positive technical effect, much like that following late-June 2010 bottom. Before saying more about this, do you see how relative strength going into this year's $SPX top weakened, whereas going into April 2010 top it persistently strengthened? Thus the present moment finding the S&P 500 at a significant line of support is technically more perilous than in May-June 2010. All the more do the worst momentum readings since March '09 (in August, bottom panel) add to the market's present weakness, now v. 2010.

So, this line of support looks sure to turn into resistance if a genuine momentum divergence is to register, like occurred late-June 2010. Yet in producing a positive momentum divergence upon sinking below its line of support, the S&P 500 will be poised to rise back up to it and likely test its resistance.

In other words, one's first thought might be that, if the S&P 500 falls below this significant line of support, it's game over: time to crash. However, there appears a technical case possibly building (requiring MACD and [likely] RSI divergence upon the S&P 500 falling below support) allowing for more time in forming wave (2) of C (since 8/22) ... let alone waves 1 and 2 of (3) of C following.

Tonight's is first thought the market's crash (wave 3 of (3) of C) might be delayed to sometime late this year or early next. There's prospective, technical justification for this view. Time is of the essence considering that, present market levels might not be seen for a period lasting decades following the market's upcoming collapse. With plenty of weak hands believing otherwise (CNBC has a bead on these folks) some weeks playing these hands is fitting prospect per a prolonged wave (2) of C.

Be that as it may, straight ahead still appears a tailspin below the S&P 500's line of support, the past two days bounce notwithstanding. Some hours more holding up could be in store before heated selling takes out S&P 500 support, then finds bottom registering with positive technical divergences signaling a subsequent bounce.

Fast Money
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