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Ominous Reversal for the S&P Deposit Receipts (NYSE: SPY)

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

August 12, 2010

Both the S&P 500 Index (SPX) and its tracking ETF the S&P Deposit Receipts (NYSE: SPY) have reversed from important resistance levels. They have also broken below a rising trend support line that forecasts lower lows ahead.

Since early July, the SPX has created a rising wedge formation. If you draw a line from the first rally high through all the subsequent rally highs, it forms a rising trend resistance line. Another line through all the lows since early July creates a rising trend support line.

A break above the rising trend resistance line would be bullish and a break below the rising trend support line would be bearish. On Wednesday, August 11, the break to the downside, and below the rising lower line of the wedge pattern, was definitive.

The odds favor declines to at least SPY 106.50 in coming days or weeks. A break below this level would point to a test of the July correction lows at SPY 101.

Wednesday’s steep selloff is worrisome for other reasons as well. The SPY reached its 50% retracement of the entire May to July correction before reversing lower.

Wednesday’s decline puts the SPY back below its 50-day moving average as well as its 200-day moving average.

The possibility exists that we have just experienced a bear market rally that has now run its course.

The ( ETF Timing Strategy has a position in the S&P 500 SPDRs.

Disclosure: The ( ETF Timing Strategy has a position in the S&P 500 SPDRs.