Today the market began the pullback that we've been anticipating in a very big way. The S&P broke the trendline that it's been riding to take us back down to 832, a level the market hasn't seen in a week. Assuming the pullback continues, it'll be interesting to find out the answer to the question we've been asking here at this blog: how far will we drop? What I've mentioned as the most likely level, and still seems most likely, is just below 800 in the S&P. On the chart, you can see the 50 day moving average right there, and if you look back a couple of weeks you'll see that this level was positively tested only a couple weeks ago. I think it'd be reasonable to predict that we'll trade sideways from here between 800 and 875 to rest up after the rally. Now let's look at the VIX:
This brings the previous prediction into jeopardy. After seeing a steady decline in the VIX over the past several days, today we saw a MASSIVE 15% increase and a return to the 40 level, which previously acted as support. What this means is that investors became less comfortable today. Bad news coming out of the banks, specifically the stress tests, could quickly push the VIX even higher. If that were to happen, the game would change completely and we'd be likely to see some panic selling. Hopefully some profits were taken from any long positions at the end of last week (a lot of profits seem to be taken today, too!), but be careful with your longs here. This is a great time to trade on a fundamental basis. If we end up trading sideways over the next few weeks, the strong will move up and the weak will move down. Buy the companies with good fundamentals, short the ones without, and let things shake out for now.
Charts courtesy of StockCharts.com
Disclosure: No positions.