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The S&P 500 to 980?

|Includes: SDS, SH, SPXU, SPDR S&P 500 Trust ETF (SPY), SPY, SSO

I am always very reluctant to call the market in one direction or another, but the technicals do point to a possible test of the 980 level we are watching. Besides the technicals, which we will get to, there are several other factors as to why I want this market to move down and test that level.

First, a lot of investors and traders were/are a bit tepid to enter into this market after it had rallied so hard off the March lows. A pullback in the S&P to 980 could be just the right time for these investors to jump in. I am actually one of these investors and have been waiting for my time to get in. Now, we did catch some of the upside, but it was through the use of option strategies. This time around I would be willing to add to some equity positions and/or open some new ones.

Second, there is an over abundance of funds that are trailing performance wise this year. If you thought you were scared to jump into this market, just think of how the fund manager feels who missed this entire rally. Any sign of a short-term pullback with anything resembling some sort of resistance could pull this capital into the markets. Fund managers can not afford to miss another large move, either up or down or they could be facing the possibility of large redemptions and high water marks they will never get out from under. Could this trailing performance also mean that they will be laying into the market if there seems to be weakness? It could, but that trade has not worked for quite some time.

Lastly, a good hedge fund friend reminded me this year that the markets have been able to “climb the wall of worry” all year. He was very much right in this sense and a pullback to the 980 level could very well be the refresh it just may need to resume a climb higher into the end of the year. I have heard the complaints that this was simply a beta rally (everything, including junk). These beta rallies almost mean throw a dart at a stock and buy it because it will rally with the entire market. I must admit that a lot of junk names rallied much more than quality names (JNJ was a high quality stock we bought when the rally left it behind). Once the rally took off, we noticed a lot of stocks starting to trade at very high deviations from their moving averages. This caused me to become cautious and implement more option strategies, as I did not want to get caught naked when the tide went out. This has served us well, but a pullback and successful test of 980 may force me to become a buyer.

Now that we have more overall fundamental outlook into place, let us move on and examine the S&P 500 from a technical standpoint. Below you will find a 9-month daily chart of the SPX with all of my accompanying notes. Please note the technical patterns/indicators I am focusing on. Read the entire research note here.

Disclosure: long SSO puts