SP500 Sitting Right Near Downtrend Resistance

spy20100211

Right now the SP500 is sitting right on the down trending resistance line that has defined the bear trend since mid January.  In fact we slightly pierced this downtrend today.

If the SP500 does not either get a flat or down close tomorrow, February 12th, 2010 then it will in my opinion put the strength of this downtrend in doubt and possibly open the door to a more complex correction that could send the SP500 as high as 1130 before turning down again.

That scenario was definitely not the one I was expecting and it still needs to be proven based on the next few days trading data.  But the market will do what it wants to do.  It is all about scenarios.

As the decline started I was looking for either:

  1. A 1975 type persistent decline somewhere in the neighborhood of 15 to 20% with very minor if any bull retracements through the duration of the correction
  2. A 1929 style very fast mini crash type decline with a speed and suddenness that would leave no doubt about the downward trend.
  3. A March 2004 type corrective scenario that is made up of a series of large swing trading corrective waves.

Scenario number 3 is the least preferred of all the scenarios because it is the most difficult to trade and the most frustrating to watch and participate in.  In fact it is probably not good to participate in that type of corrective scenario at all.  If you want to see what it looks like just look at the Sp500 back in the March 2004 time frame and look at the large swing trading ranges that were created.

If we were to duplicate that now then the SP500 could trade as high as 1130 only to peak out and then trade down again, but only to MARGINALLY lower lows than our most recent lows.  The reasoning for that is that if we have such a large upward retracement to 1130, then technically what that would do is weaken the overall nature of this decline and set up a scenario whereby the next decline wave is not able to carry through significantly, only marginally.

Here is what it could possible look like:

 

tradingrange

The market has not ‘decided’ that it wants to do this type of scenario yet.  But the next few days could go a long way towards deciding it.

I really do not want to see this type of trading scenario develop.  Honestly, it would be a real downer if we do for the simple reason that it would be very choppy messy trading within a slightly angled swing trading range down trend.

A slightly more mild version of scenario 1 that I listed above is still possible.  The next few trading days should help provide a clearer picture.

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