Basic Materials, Energy and Financials Lead Market Lower; S&P at Key Pivot Again

The U.S. stock market is headed lower around mid-day on Wednesday with the basic material and financial sectors leading the sell-off. The Dow Jones Industrial Average has fallen around 120 points to 12,170 while the S&P is down more than 13 points to 1,252. The NASDAQ Composite index is off 1.03% to 2,598. The worst performing sector on the day has been Basic Materials, which are down 1.73%, followed by Energy which has lost 1.41%. The Financial sector is also weak, falling 1.32%. Heading into the New Year, the stock market finds itself at a very important inflection point. Pulling up a 6 month chart of the S&P 500 reveals that the broad index of U.S. stocks has traded above the 1,250 level for a number of days on seven different occasions since the August sell-off. This 1,250 level was very strong support for the market from January to August of 2011. It was when this level was breached convincingly to the downside that the summer sell-off got ugly. Now, 1,250 has become significant resistance in the S&P, which has simply not been able to hold above this level for more than a few days since it was breached back in August. The inability of the S&P to maintain this level could be a cause for concern. It suggests that there is a lot of supply in this area and that the market is unlikely to move higher until all of the stock for sale around 1,250 in the S&P is absorbed. Furthermore, the sheer number of times that the index has poked through 1,250 in the last 3 months only to fall after a few days suggests that the market could be setting up to make a major move from this key pivot. The inability for the 1,250 level to hold could cause discouraged bulls to throw in the towel and liquidate positions. A market that repeatedly runs into a resistance level and cannot break through will eventually get exhausted and is susceptible to a substantial sell-off. On the other hand, this seventh foray above 1,250 in the last few months could lead to a break through and a powerful rally. A convincing break through very strong resistance could easily catalyze a strong move higher in the S&P at the beginning of 2012. Given the market's behavior around these levels, short-term traders may want to use 1,250 as a guidepost for managing risk and positions. If the index remains above this level in the coming days it could be a good area to add additional risk on the chance that the market is setting up to leave this congestion area and trade to the upside early in 2012. Conversely, traders may want to pare down bullish positions if the S&P begins to move below the 1,250 area. Over the last 3 months, there have been a number of substantial sell-offs after the S&P traded above this level only to fall back below it within a few days. For example, on Friday, December 9, the S&P closed at 1,255. The following Monday, the index took out 1,250 to the downside and reached a pivot low of 1,205 by December 19. A similar, but much larger, sell-off also occurred in November. On November 15, the S&P closed at around 1,257. The following day, the S&P fell around 20 points and continued to trade lower until bottoming out all the way down at 1,158 on November 25.