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Huge Declines Signal Lower Lows Ahead

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

February 5, 2010

Both the S&P 500 Index (SPX) and it’s tracking ETF the S&P Deposit Receipts (NYSE: SPY) suffered huge declines on Thursday, February 4 with the SPX dropping 3% and the SPY 3.1% in six and one-half hours of trading.

Only a week ago we wrote; “several support levels have been broken including the 50-day moving average; the 50% retracement support for the October-January rally at SPX 1774 fell on Thursday. The December lows at SPX 1088 and SPY 108.8 were also broken on Thursday. This is increasingly looking like a market headed for dramatically lower lows.”

Several financial newsletters have forecasted a catastrophic decline ahead based on Elliott Wave patterns, with the current selling possibly the beginning of the decline.

We do not know if such forecasts are about to be fulfilled, but we are bearish for the short term on the stock markets in the U.S. as well as global markets.

If this turns into a typical correction, and not a catastrophic decline, there will likely be three waves in an ABC decline before a bottom is reached. We are only in the declining Wave A now. There is probably a rally Wave B ahead and then a third Wave C down. How far down, and how many bearish patterns remain ahead, cannot yet be forecasted.

The SPX and SPY could make a case that Wave B occurred at the highs on the first two days of this week and that we are now in the final Wave C down. But most other indexes did not have solid rallies early this week. The Nasdaq Composite Index COMPQ, Nasdaq 100 Index NDX and Russell 2000 Small Cap Index RUT had only minor advances and appear to still be in the initial down wave (Wave A).

The next support levels are at SPX 1042 and SPY 104.32, the November 2 lows.

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