Yesterday, the markets deteriorated sharply at first with the S&P; 500 finally finding support at its 200-day moving average of 1,101, which turned out to be the low of the day. The support level held for the time being, and we bounced off and ended up closing only 0.51% lower.
It could have been far worse, as major selling would have set in had this level been violated. As it stands right now, this bounce gave us a little breathing room, but there is a good chance that this level will be tested again.
The culprit for the continued selling spree came in form of an announcement from Germany last night as they set in place specific rules to ban naked short selling of stocks of key banks and European Government bonds.
As we’ve seen in 2008, when similar bans were introduced here in the U.S., the downward trend was stopped temporarily, but eventually momentum continued fast and furious to the downside causing heavy losses. We’ll have to wait and see if things will play out the same in euro-land.
With yesterday’s action, our domestic Trend Tracking Index (TTI) moved a little closer to its long-term trend line, but still remains 2.12% above it, which means that technically we’re still in bullish territory.
I would consider the current period neutral and a time of transition. In other words, directional momentum has changed and most of our sell stops, with the exception of some sector funds, have been triggered. This is not the time to be a hero and add new positions hoping for a rebound, since downside risk is simply too great.
Should the 200-day moving average on the S&P; 500 (~1,100) not hold, there is no way of knowing how far south this market can go. As long as the situation in Europe does not show any signs of improvement, or at least better unity in combined efforts, we have to live with the current volatility and the distinct possibility that this bull may turn into a bear.