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Equities: A Floor Has Been Set

The oversold bounce that occurred 3 weeks ago when investor sentiment was extremely bearish did one very important thing: it put a floor under this market.

Figure 1 is a weekly chart of the SP500 with the red dots serving as key pivot points. Key pivot points are the best areas of support and resistance. The bottom that was carved out 3 weeks ago has put in a key pivot point at SP500 1267.71 (see blue up arrows on chart ). This is support. Back testing on this asset and on multiple assets shows that breaks of support levels generally are an ominous sign. Therefore, I would view a weekly close below SP500 1267.71 as a bad sign. Why? Because the definition of a down trend is lower highs and lower lows, and support levels that fail lead to lower lows.

Figure 1. SP500/ weekly
SP500 / weekly

Does it always work out that way? Of course not. Last August, there was a close below a key pivot level or support level (see black up arrows on chart), and the market situation was dire until Ben Bernanke announced QE2. The market reversed and never looked back.

SP500 1267.71 is the line in the sand. Closes below this level would have me very cautious. A close below this level and a close back above this level would be bullish. Of course, we will see how the market action unfolds and allocate accordingly.

 

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