Last week we observed that the SPX is building a bear flag, that market internals are overbought, and that traders should keep a close eye on the 1290 level.
The gap up on Tuesday, after the usual and compulsory "encouraging" week-end news from Europe, proved to be the perfect fade and the SPX lost 54 points on a daily closing basis.
As one could expect after such a drubbing, the indices are ready for a dead-cat bounce. The focus should remain on the 1290-1295 zone for signs that the current downswing is complete:
The weekly SPX retracement chart suggests that support is in the vicinity of 1265-1275, which coincides with the 38.2% retracement level of the July '10 rally. (Source: OT Fibonacci)
