That thick red line is the 50 day simple moving average and it's long gone. Here's what happened the last time the $SPX lost it's 50 day MA:
Not calling for this to happen again now but with fundamentals so front and center right now it's not far fetched to expect something like it. The market left to it's own devices wants to reset everything. We don't need to see dramatic earnings depreciation to see dramatic down moves in the markets. All we need is a perception of a future where nothing works to help the economy except starting from scratch.
From a pure technical view point the $SPX should be making new all time highs right now. In fact I called for just that a few weeks ago. In defense myself and technical analysis I also gave a flip side scenario backed up by technical analysis also but that old recency bias of mine gave more weight to the bullish analysis. Why? because if you ask 10 informed people if they think policy makers will allow the US economy to go over the fiscal cliff all 10 will answer "No." Those same 10 people if they were traders though would be flat or short this market now also. Because most smart traders know that what you "think" means nothing to the market and it's far better to conserve capital than to bet on uncertainty.
It used to be that the fundamentals were things like ratios that told a story of the underlying business or company, or gross domestic production numbers and the such.
Now fundamentals are who will become the next senator from New York, or the next House Of Representatives member from North Carolina. Some argue it's always been this way but I disagree because no matter who the person was you could count on her or him to always support things that would help the economy. This meant that while it may have mattered on some level whether an elected official belonged to one political party or another, never was it on the level we now see. The economy never had to worry about a party deliberately impeding it's growth for political gain. I see this more on the GOP side of the isle as Pres. Obama took a lot of heat for saying he was open to bleeding some sacred cows.
As crazy as Newt Gingrich is he was never so crazy as to allow millions of Americans to be out of work without doing something about it. In the 90's it wasn't like his political party was noticeably different from now. He took tremendous flack for compromising as did former Pres. Clinton but they were men among men. They were leaders, and that's what leaders do. They pull you kicking and screaming to where you need to be but don't know it yet. Our leaders now see a little kicking a screaming and they stop pulling. And this isn't me reminiscing of times of old, this is hard facts jack.
Now the economy is almost left to it's own devices outside of liquidity measures and those are being combated by a lack of policy. Without growth policies the economy only has one choice, and that's to reset. The reset will be a lot worse than the fiscal cliff fall because it will entail real deflation that once set in motion will be super difficult to stop let alone reverse. Every negative on the economy will get priced into the market in short order. The psychological effects on the market will rival the great depression and it's not clear if the economy will survive another one of those.
The same way overbought reading meant nothing in 2009 and '10 so will oversold readings mean nothing. We saw it in 2007 and '08 so it should still be fresh in our minds. I call it "The Revenge Of The Fundamentals" because your technical reading break down. Trend lines disappear. The only way to avoid this is for our policy makers to pass some pro growth policies. But first they have to start working on some. This won't happen until after the election if at all so we have to wait. Mean while the market hangs in the balance literally.
With the tech sector taking the biggest hit recently leading the markets down that's where I look for clues of what's next. Below is the $NDX daily chart with a channel overlaid that goes back to august 2011:
As you can see price is right at the lower channel line and if you look closer in the next pic below it looks like it wants to bounce.
Thing is, there's nothing fundamentally that would lead us to believe that it will be a significant bounce. So, I'm looking for a test of 2700 and nothing more. If you look at the last 4 bars they're all demonstrating buyers being absorbed. The last bar could be a sign of sellers abating but I think it's more sellers leaving early on a Friday afternoon. We shall see but until we hear some concrete plans for growth any upswings will likely get sold into. Also there's a high probability that the capital gains tax will be higher next year so that's pushing ppl to sell now, so that's another headwind. an added bullish thing the chart tells us is this:
You see that thick purple line that price closed above? That's the 200 day and it should give us some support.
All in all only time will tell if we go to hell in the markets or get a reprieve. A look at the dollar index says a short bounce at least should be here now but beyond that it's up to the policy makers. That sounds crazy and it is but it's true. The craziness of the whole thing is the main reason the fundies are killing us right now. It started with the IMF economic downgrades and lead to a fiscal cliff selling frenzy. Maybe the word "frenzy" is too harsh, the $NDX is only down 7% from it's peak but it feels worse. And if the folks in Washington don't get it together soon it will get much worse. Until next time traders good luck and happy hunting!