Next Stop, S&P 1,000

I think it's fair to say that the 1,100 level on the S&P 500 will hold for a little while longer.  In a manner reminiscent of the rally that was seen on July 7th, stocks sold off hard today as investor concerns over deflation and slower earnings growth among the country's major banks overwhelmed any lingering bullish sentiment.  Volume on the day was higher than what we've seen over the last couple of weeks, but still nothing to get excited about. (S&P 500 volume was 4.8 billion shares)  Treasuries continued their rebound throughout the day and saw 10-year yields grinding down to the 2.92% level, which now approximates the low yield seen nearly two weeks ago.  Getting back down to this level this quickly is a sure fire sign that investors are getting more and more concerned about the prospects for the U.S. economy.  Interestingly, the economically sensitive commodities sector saw only mild selling today.  Crude oil fell a measly $0.21 per barrel, while gold actually managed to finish the day mildly positive.  I suspect that there was a bit of a 'flight to safety' trade as well as some currency hedging in the gold market that helped keep it bid throughout the day.  Gold still isn't giving me any real insight into the ultimate direction it wants to go, so my confusion with this market continues.

As the title of this post stated, I believe the S&P 500 is now headed for the 1,000 level.  This target is based on one of the technical indicators I use as well as my fundamentally bearish view on equities.Check out the chart below:

As you can see, the S&P 500, after briefly spiking above the downtrend line (green line) that has been in place since late 2007, appears to be returning to this trend.  Furthermore, the price action of late has been range bound within the price channel indicated with the pair of red lines.  Both of these indicators are bearish on their own, but when taken together the case for lower share prices is strengthened even more.  The recent rally failed almost exactly at the upper band of this price channel and today's close could not be sustained above the longer term downtrend line.  Definitely not anything to get bullish about.  You can see the price channel in greater detail in the daily chart below.

So how do I come up with my S&P 500 target price of 1,001?  As I outlined in my post entitled Wild Day. Should Have Seen It Coming, I showed how divergences between the RSI and a security's price trend can yield accurate price projections.  Well low and behold the S&P 500 just provided this signal once again.  As you can see in the chart below, the successive highs in the RSI have been met with successive lower highs in the S&P's.

This means that the measuring rule can be used, as before, to develop the projection.  Taking the difference between the closing highs and subtracting it from the low close of 1,022, a price projection of 1,001.55 is developed.  For confirmation of this, I look to the other charts to see if they confirm this possibility as well.  The long term downtrend is obviously supportive of a move lower.  More importantly from a near term perspective, though, is the price channel in which the market has been trading.  As prices have been well contained in this channel, it's important that the lower bound accommodate the lower move.   The daily chart shown above definitely shows that a move to the 1,000 level is possible while remaining within the channel.

It's this confluence of indicators (as well as the fundamentals, of course) that enable me to make this call with conviction.  As I came into the day slightly short, I'm happy that my positioning appears to have been correct.  With that said, I would like to have been shorter had I known that the price action would play out as it has today.  I'll be looking to get shorter if there's a meaningful bounce on Monday, but I suspect that any bounce will be short lived.  Otherwise, I'll continue to ride the wave lower before pulling the position.  Much like the recent rally, I think this dip will be fast and hard so strap yourself in for a wild ride.

Another week is in the can.  Things are starting to get interesting and its worth taking some risk off the table even if you weren't able to do so by the close today.  I'll be reviewing the Bank of America and Citigroup earnings over the weekend to see if all the concern has been justified.  I suspect that the sentiments are well founded, but I'm not willing to rely on consensus for my perspective.  And given all the uncertainty in swirling around most financial markets at this time, the correct perspective is the most critical thing to have.

Challenges abound for the bulls, but buying opportunities are always out there.  I'll be sure to keep looking for them, but for now I'd play things from the safety of cash or an outright short if one is looking to take a little more risk. If you're considering an options position, I would rather be a put buyer than a call seller as the volatility is likely to continue upward if the sell off I'm calling for materializes.  A bear fence (buy a put, sell an out of the money call) would also be a good strategy in here as well.  Treasury positions could also do well in the near term, but, in my opinion, the risk/return profile makes it less attractive than outright shorts.  Have a great weekend!