Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
The market was stretched to the downside yesterday at its lows and hit the key S&P 1538 level which provided support twice earlier in the past 2 months. So going through to break it immediately after a 3%+ correction would have taken a serious amount of panic or fear. Instead starting at 3 PM after a quick undercut of that level they have been bringing the market back up, despite the IBM damage on the Dow.
The more one utilizes Fibonacci lines the more one sees how prevalent they are in the markets – either these are the magical numbers that rule our universe OR they are something the algos on Wall Street are really programmed to. Probably some combination of the two. Whatever the case as I peruse why the S&P 500 has bounced to where it has this morning, you can guess where we have stalled. Right at the 23.6% retrace of the drop from April 11th. If the bulls can push through this level the next stop would be the 38.2% which would be about 10 more S&P points. You can see where the 50% and 61.8% retraces measure to as well below: 1566-1573ish.
At this point in a correcting market long side plays are short and sweet as the action is very random and what worked yesterday (for example metals / mining / coal / oil) gets crunched today. Trying to catch 20 S&P points up when the potential lies for much more down is really for the daytrading set. The last holdouts remain utilities, biotechs, and consumer staples; if this is going to be a true correction of a meaningful sort they will eventually get to them too. We’ve had two 90% down days this week so that is nothing to sneeze at.
There is the potential of a very obvious “head and shoulders” top forming here. Granted, EVERY selloff has the potential for a head and shoulders top by nature, but in this case watch for some work in the 1540s-1560s in the days to come, this would create a right shoulder. *If* that happens and *then* 1538 breaks (the neckline if you will) there is a measured move down to 1480ish. But first the institutions will want to lift the market back up in this 1540-1560s area to unload more of their inventory.
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