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S&P 500 Index (SPX) Will Test Correction Lows

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

August 27, 2010

Both the S&P 500 Index (SPX) and it's tracking ETF the S&P Deposit Receipts (NYSE: SPY) are headed for a test of their correction lows in coming days.

On Thursday, August 26, the SPX rallied at the open after new jobless claims came in at 473,000, 27,000 less than the previous week’s 500,000.

The rally reached the prior support level at SPX 1060 and reversed, closing at 1047.22. The 1060 level was critical, marking the July correction lows as well as the 61.8% retracement support level for the entire July to August rally. The SPX 1060 level was broken in Tuesday’s August 24 gap down decline and on Thursday it acted as resistance.

Thursday’s action almost guarantees a test of the early July lows at SPX 1010.91. For the SPY it is at $101.

Other bearish indicators are; the break of the rising wedge pattern three weeks ago, the SPX being below both its 200-day and 50-day moving averages and the 50-day being below the 200-day average.

Not to mention the growing unease among investors worried about a double-dip recession. The test of SPX 1010.91 is just ahead.

Note, the Dow is now below 10,000 and the stock market is oversold. Tomorrow’s GDP second quarter revision report will without a doubt move the markets. Investors are expecting the worst so anything equal to or better than expected could result in a “sell the rumor, buy the news” rally.

But even if the market rallies, we are back to business next week.

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.