Critical Market Juncture – Another Leg Down

The March Low

Previously, we established that the S&P and STI were correlated and traded in tandem. Over June, the S&P and STI have trended lower, tested their respective 61.8% Fibonacci retracement levels and broken to lower ground.

During the past week the S&P tested the March low at 1257 and closed below it. Breaking the March low is a bearish sign. The March low is significant market juncture because it is the floor from which the market rallied from in Q2, representing a strong level of support. The breaking of this support level would thus indicate that downward momentum is strong and we should expect lower lows in the coming weeks.


S&P500, Daily Charts: Close below March low


The STI has likewise declined over the past month, although not as severely as the S&P. It is hovering around the 75% retracement level at 2880. There are two possibilities for the STI, the first being that the STI is relatively stronger than the S&P. This would be confirmed if the STI fails to break its March low and instead rallies. The second scenario is that the STI is lagging the S&P and if this is so we should see it test its March low at 2927 and head lower.


The Weekly Close
For the next down leg to be confirmed, the S&P would need to close below the March low not just on the daily charts, but also on the weekly charts (ended Friday). A close on the daily might not be sufficient to confirm another leg down if we are to factor in the possibility of a "whipsaw": price trades down below 1257 and encounters very strong short term buying, pushing the market above 1257 again.

"Whipsaws" have a much lower probability of occurrence in the weekly timeframe. For that to happen the market would have to reverse all the downward momentum and trade higher for two to three days, and then close higher for the week. In the midst of a downtrend, the odds of having one strong rally day (daily whipsaw) are much higher as compared to having three successive rally days in a row (weekly whipsaw). Using the weekly close gives us more certainty that the trend is continuing down.


Sentiment
Sentiment remains poor at this juncture with the market continuing to sell off in the face of mortgage write-downs and rumors of more bank failures. What we want to look out for in time to come is for the market to trade higher or remain flat in the face of bad news. This would indicate that selling has run its course and a reversal might be in the pipeline.


Summary:

The S&P has closed below its March low on both daily and weekly timeframes. It has already begun testing support lower levels. This is a bearish sign and indicative of strong downward momentum and lower lows to come. The STI has held above its March low, but whether this is a sign of strength or a mere lag has yet to be seen.

We advise buyers to be cautious in this bearish environment, as the trend is still downward. Watch the major support levels indicated below, the market is very likely to see some minor rallies there.


Critical Support Levels:

The S&P just tested the first support level at 1225 on Friday.
The next major support level to look out for is between 1130 and 1175.


S&P 500, Weekly



STI Weekly

Research Team

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