Technical Update: S&P 500

The change in sentiment was palpable last week as the S&P 500 convincingly broke below its 50 day moving average but was the technical damage as severe as it felt?

A panicking investor doesn’t make money so lets counteract it with some perspective. Even in the choppy market of late, the market was severely overbought on all charts and timeframes. Sentiment was far too bullish. Everybody knew that a correction was coming—they just didn’t know when.

The “when” was last week. Prior to last week’s Fed day, it quickly became clear that whatever Bernanke said wasn’t likely to send the markets higher. The Q&A was enough to spark the selloff everybody was waiting for. Markets around the world were already in terrible shape with some, including the much-talked about Japan, in bear market territory. The media gave us all of the possible fundamental reasons for the selloff but a look at the technicals show that withstanding all of the negative headlines would be too much for the markets.

Not only did the market break down, it did it with volume suggesting that the so-called “smart money” sold along with retail investors. Investors are clearly concerned but again, perspective is key.

On Friday, the S&P sold off to 1,577—a perfect back test. Then, it rebounded. That’s bullish but attempts to buy on the dips, something that worked so well in the recent past, were easily fought off by the bears. The market tried to rally but couldn’t. For now, we’re in a technically broken market and all signs indicate that the selling isn’t over.

If the selling isn’t over, how much lower will we go? As of Monday morning the index is at 1,592.43. First, the bears will have to break through the strong 1,576 level. After that, watch for 1,550, 1,540, and 1,520.

The media will jump on the bear market/"is this the next recession" talk as we move lower but in terms of healthy technical action, 1,520 would likely allow all of those technical overbought signals to mitigate. This would set the market up to go higher. 1,520 also represents a 10 percent correction. Don’t panic if the market continues lower. There’s nothing in the charts indicating that we’re going the way of Japan or that the next big 2008-style crisis is upon us.

Futures indicate a lower open on Monday. You could try to short the market but anything involving timing the market direction isn’t likely to pay off. Wait for those great long opportunities to present themselves.