Technical Analysis Update
An update on the technical situation in the market. After the upside breakout, the market melt-up attracted a lot of momentum traders and also more conventional “chasers”. As such, the US Equity market became extremely extended both in terms of technical indicators and sentiment indicators. In addition, there was lots of speculative upside positioning in futures markets and in options markets. Thus, this is a situation in which there is a great deal of upside US Equity risk exposure by speculative players.
In this context, the S&P is currently (as of 12:45PM EST) in the process of breaking (as of yet unconfirmed break) an important region of short-term support at around 3200. If this region is, in fact, broken — due to the extremely bullish positioning — hard and soft stop losses will be triggered creating a cascading wave of selling that is likely to create high volatility and is likely to ultimately send the S&P 500 down to an initial support at around 3050 — at a key upward sloping trend line.
That upward sloping trend line is fairly important and could hold potentially for a while. The market should then be supported by a pretty wide band of support right below that between 3025 to about 3875 — horizontal support lines and longer-term moving averages convergein this region. I am expecting lots of violent up and down “thrashing” if we get down into this region. This is a critical region from an intermediate-term standpoint.