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A High Probability Technical Snapshot of the S&P 500

Simon Maierhofer

If you, like many others, suffer from news fatigue (Spain, Greece, Federal Reserve, etc.) you may appreciate a simple high probability technical take on the market. It's short and sweet, but won't leave you with a sugar rush or news hangover.

I'm the last person to claim that I've figured out the market, but I figured out something else important. Wall Street (or the media) has no clue and it's often best to ignore news reports or use it as a contrarian indicator.

Blind Leading the Blind

Before we examine yesterday's decline through the technical lens, let's take a look at the near-100 point bounce from the June 4 low and its significance.

On June 4, 2012, when the S&P dropped as low as 1,266, Bloomberg reported that: "Goldman sees potential for S&P 500 bear market." The next day, stocks recovered and Reuters wrote that: "Wall Street rebounds but mood still sour."

A "sour mood" (or blood on the street) is generally good for stocks. Various technicals, bullish divergences and support/resistance levels strongly suggested the exact opposite of Wall Street's mood.

The June 3 ETF Profit Strategy update stated that: "A price low against that kind of RSI divergence commonly signifies a bottom of some sort. Another low in combination with a reversal day (stocks decline and recover thereafter) would further increase the credibility of any new low."

The new low and reversal day happened the very next day and the following trading advice from the June 3 update worked out well: "If you are playing the odds, you will be selling your short positions right about now and leg into some long positions once we see the S&P dip below support at 1,267 and move back above it." The S&P (SPY - News) rallied 96 points from 1,267 to 1,363.

How Significant is Yesterday's Sharp Sell Off?

Thursday's 2%+ decline in the S&P (^GSPC - News), Dow Jones (^DJI - News) and Nasdaq (^IXIC - News) didn't come out of the blue. The chart below shows a resistance cluster surrounding S&P 1,360.

>> click here to view larger chart


There's the 61.8% Fibonacci retracement of the points lost from April 2 - June 4, the April 9 and April 23 low and most importantly, strong trend line resistance of a head and shoulders pattern that goes back more than a decade.

Based on this resistance cluster, the June 3 Profit Strategy update said that the: "Potential rally target for this rally is at 1,360."

The S&P reached its target, so there was no need for stocks to go any higher. In fact, it would have taken a move above Fibonacci resistance at 1,363 to unlock more bullish potential.

Wednesday's (June 20) ETF Profit Strategy update highlighted a sell signal for stocks triggered by the performance of the VIX (VIX closed below and back above the lower Bollinger Band) and recommended selling long positions and going short.

While those short positions are in the money already, we may need to be patient because yesterday's low occurred against Fibonacci support (red line) and triggered a low-risk entry against support. This results in a bounce more often than not (of course we have a stop-loss in place).

The ETF Profit Strategy Newsletter analyzes an array of complex indicators (technicals and others) and converts them into straight-forward short, mid and long-term forecasts along with actionable buy/sell recommendations.

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