By Andrew Nyquist
So is the index just catching its breath for another run higher next week to the 1340-1350 zone, or is this the beginning of a breakdown?
Although the S&P 500 started to show signs of overheating yesterday, it’s hard to imagine a breakdown occuring today. Now, I’ll never say never, but the first run at support (see chart below) usually holds and elicits a re-test of the recent highs. And furthermore, market tops (short or intermediate term) usually take at least a few days to form… so it’s hard to imagine the S&P 500 breaking down so quickly.
One other characteristic to look for over the near term (and to be careful not to get caught up in) is the good old-fashioned reversal. Now this doesn’t always occur with market tops, but it tends to trap the most people and lead to more severe and lasting declines. This scenario unfolds when the market stalls for a few days (giving mixed signals), before thrusting higher, only to reverse during the middle of that day and close significantly lower. If you are an active investor, you may want to assume a defensive posture, while keeping this in the back of your mind.
Happy investing.
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Position in related S&P 500 short funds SH and SDS at time of publication.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of his employer or any other person or entity.
