After Tuesday's terrible day in the markets, it is clear that a head and shoulders pattern is forming within the S&P 500. The head and shoulders pattern is a bearish technical pattern, and one that is usually followed by a solid market sell-off. The S&P closed way below it's 200-day MA on Tuesday. The 50-day MA is also extremely close to crossing below the 200 day, which would be another sign for the market to take step downward.
If the support of 1040 is broke, and I mean a solid closing below 1040, then I think the downside risk is huge. I am not offering an actual prediction for a bottom, but I'm willing to say we could be looking the S&P to bottom around 850-950 in the longer term. Friday's employment data will be market moving for sure, although we are expecting job losses due to firing of census workers. However, anything worse than expected will surely lead to a market sell off and thus give us the necessary close before 1040 to conclude that next leg down is in play.
The chart below gives some indication of why we feel the S&P will drop so much. The drop is considered finished, or bottomed, when the price declination is equal to the decline from the head to the neckline. This puts us in the 900s range. Its tough to offer an exact prediction of where it will finish, but surely things will not be pretty. Next week, there is limited economic data coming out, due to the shortened holiday week. However, in 2 week's time we get a slue of data, which will surely move markets. Can the bulls hold the 1040 line?
-(Chart created by Jeff)
My prediction is no. The coming data will be too weak. If there is a hint of European Growth slowing down, a faltering US recovery, or some kind of negative news from the G20 Summit, things will head south in a hurry.