S&P 500 going to 800 - win short, lose long
On Sept 17, we predicted that the S&P 500 would go to 800 if it failed to find support at 1050. The index pierced 1050 a few days ago and hasn’t looked back since.
In the last couple of days several of the experts interviewed on Bloomberg TV have spoken in terms of S&P 500 in the 800-900 range. Bloomberg’s guest technical analyst Louise Yamada predicts support may be found at 850.
If support is not found at 800 to 850, there is isn’t much in the technical world to suggest the next level of support. Anything could happen. Given the amazing last few weeks it might be appropriate to say that just about anything will happen.
In addition to looking at the price chart for clues about future prices, the “volume at price” indicator is concerning.
There is massive overhead ownership of SPY at prices above 80 (the rough equivalent of the S&P index at 800), as well as above the current price in the low 90’s.
click images to enlarge
That suggests to us that the overwhelming majority of owners are in a loss position, and that a huge portion are promising themselves that if they can only break even, they will sell.
The desire to sell creates a continual supply of downward pressure that may be more committed than the buying pressure that minor recoveries might engender.
The combination of market confusion, total lack of clarity about future earnings, in combination with the likely overhang of prospective motivated sellers, does not bode well for a sustained strong rally in the immediate future.
Continual roll-out of ever more government programs to shore up the markets, may be creating as much or more panic than it quells.
The prospect of California and other states begging for a municipal bond bail out, and the possibility of a banking driven national bankruptcy in Iceland don’t help confidence in the least.
The good news is that there are gains being made in SDS (the double inverse of the S&P 500 index) if the downward direction of the index continues.
WARNING: SDS is quite volatile due to its 2X inverse portfolio. The chart shows its greater upward change than the downward change in the SPY. It can create both losses and gains very quickly.
Richard Shaw
QVM Group LLC
Disclosure: We are short the market through SDS against long positions in certain individual stocks.