The following SP500 price chart illustrates how the dynamic of the market punishes the latecomers and the ill informed. Here’s how it played out as I interpret it: 1) SP500 start the oversold rally back to test the 1040 level after the 4th of July break. It reversed after it has reached the 1042.5, this gave the late bears confidence to go short with the believe that the market will head lower after it has recently broke the widely watched head & shoulder pattern. Of course, those that have shorted the market when it was above 1100 have covered as it bounced up to test the 1040 resistance. 2) On the following day after the 1040 reversal, the market rallied and the SP500 gained over 30 points. This rally trapped the late bears.
3) As this oversold rally continues and it has reached the resistance of downtrend price channel and the 50 SMA, those trapped bears are being squeezed and the lure is set to sucker those anxious bulls. 4) As distribution starts, the SEC put out words near Thursday close that a ‘significant announcement’ will be made at 4:45PM ET. And the people in the know (there are always people in the know) started rallying GS, and the market buzz is that GS has settled with the SEC on the fraud charges. This gave the early money a gift on exiting their long positions without putting pressure on the price as the last bunch of anxious bulls are being suck in with the help of Uncle Sam. This near the close rally helped the market to recover its losses and closed with a small gain. 5) The trap is set and snapped. Now those trapped anxious bulls will be hoping all the way down to 1040 for a bounce back up above the 1100. From the way things are looking in the price action, the market will cause the hopes from these trapped bulls to die in vain.
The near term support will likely be 1040 and the downside target remains to be in the 870 area. I remain to be bearish until the SP500 has shown it can break above 1125/1130 with convictions and breaking the lower high/lower low pattern.
