S&P Faces Critical Test at 2,060 -- Will China Save Us?

Here we go again!

The S&P Futures are re-testing that 2,060 level, which is 20 points below the 200-day moving average and, more importantly, 35 points below the 50 dma, which means, if we finish down here, we can drag the 50 dma almost a full point lower and a few days like that can bend the line down and then we're heading into our 3rd major death cross sometime around the end of September.

That's why we look for strong bounce lines off these critical support levels -- if we don't get the bounces, the shape of the charts will change and that will turn sentiment more bearish and make it all the much harder for the indexes to rally in the Future. All this is taken into account by our fabulous 5 percent Rule which, as you can see from yesterday's Big Chart -- has really been driving the market lately.

Last week, we discussed our outlook for the S&P by examining some of the major components and contemplating whether or not they could drive the market any higher and we concluded that Exxon (XOM) and Chevron (CVX) would be a drag on the S&P and the Dow with oil at $43. A week later, oil is at $41 (we went long at $40.65 this morning in our Live Member Chat Room) and both companies have had a TERRIBLE week, with XOM down 2.75 percent and CVX down 5.75 percent (about the same as oil itself), both costing the S&P and the Dow heavily.

Of course, we told you this would happen last Thursday, so don't act all shocked about it this morning. In fact, yesterday's morning post called the action in the headline ("Whipsaw Wednesday - Monday Market Gains Gone in a Flash (Crash?)") and you can have those posts delivered to you pre-market, every day, by signing up right here.

Last week, the conclusion of our two-part study on the S&P was:

So, upon further examination, there is no change to our stance of being short the markets at these levels which, on the Futures this morning, are 17,400 on the Dow (/YM), 2,095 on the S&P (/ES), 4,550 on the Nasdaq (/NQ) and 1,212.50 on the Russell (/TF) and, as usual, we look to short the laggard of the set with tight stops above.  We also took on a more aggressive SDS (ultra-short S&P) position yesterday afternoon – as we felt the run-up was nonsense anyway – this post just confirms our gut reaction

Be careful out there!

As of this morning, we're flipping long for the bounce and that means we're officially calling off those trades at:

  • Dow 17,150, a 250-point gain off last week's short and up $1,250 per contract
  • S&P 2,060, a 35-point gain off last week's short and up $1,750 per contract 
  • Nasdaq 4,475, a 75-point gain off last week's short and up $1,500 per contract 
  • Russell 1,190, a 22.5-point gain off last week's short and up $2,250 per contract

For the Futures-impaired, we suggested SDS, the ultra-short ETF of the S&P and that ETF is up 5 percent from Thursday's open, now $20.82, which is a double on the Sept $19 calls at $2, though we already took that money and ran on Tuesday's spike up and shifted to a longer-term SDS hedge in our Short-Term Portfolio.

Now the battleground will be fought on the S&P at 2,060 but we expect this line to be held up (this time) by our friends in China, who have their own market emergency to contend with as the Shanghai Composite dropped another 3.4 percent overnight and took us back to the hyper-critical 3,500 line which MUST HOLD, as it's 30 percent off the silly top but, more importantly, it represents the line at which the Chinese Government has been assuring investors it would be safe to buy at for the past month and you know what they say about "fool me twice."

The July 9th (also Thursday) spike low was 3,373 and the index was jammed up 10% off the low the same day (see "Flip Floppin' Thursday -- China Arrests the Short Sellers" and "Friday Market Fakery -- Dollar Dip Does the TRICK!"). Keep in mind, China halted 2/3 of the stocks ahead of the 10 percent pump job. If they try to prop up the index without the halts this time -- they may find it's much more expensive than they realized to prop up the market and that may cause their resolve to falter -- so we're going to be VERY concerned about China for the next few days!

China may find it difficult but I believe they WILL prop up the markets and then we WILL rally because China rallied and all will be well for another few days in this Fantasy Land Market we've constructed for ourselves.

You can see more technical analysis in the pre-market Alert that went out this morning to flip long on the indexes, oil (prices noted above) and gasoline ($1.52 on /RB), the twitter link is noted below but not many of our Member Alerts are tweeted -- this one was obvious and actionable.

Be careful out there!