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Stock Market Hits a Wall!

|Includes: SPDR S&P 500 Trust ETF (SPY), SPY

January 22, 2010

Both the S&P 500 Index (SPX) and it’s tracking ETF the S&P Deposit Receipts (NYSE: SPY) have pulled back dramatically this week, taking a 2+% hit on Thursday, January 21.

Is this the end of the huge advance that began in March, 2009?

It is far too early to state that the advance is over. Typically pull backs start with heavy selling and that is just what happened in the June 15 correction, plus all of the minor corrections since on Sept 1, Oct 1 and also on Oct 26.

Yet each of these overwhelmingly bad days were eventually surpassed when the advance reasserted itself in following weeks.

Certainly it would not be a good idea to enter new bullish positions here. If this is a typical correction there will likely be three waves in an ABC decline before a bottom is reached. We are only in Wave A now. After this pattern completes, and after a bullish reversal day, it would be time to buy.

If in fact we are headed for a big decline as some market forecasters are stating, major support levels will fall first, such as at SPX 1088 and SPY 108.8. After this is critical support at SPX 1036 and SPY 103.50.

Look for a normal correction in coming weeks followed by resumption to the upside, but be ready to take action if we start breaking below critical support levels.

Disclosure: The ETF Strategy has a position in the S&P 500 SPYDRs.