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Wednesday, August 3, 2011

The Bears Turn Up the Heat

Tuesday marked a clear victory for the bears, but increasingly oversold technicals have the potential to at least thwart their progress in the near-term, as statistical probabilities alone favor a bounce before too terribly long. Nearly everyone has duly noted the ominous violations of both the much-watched 200-day simple moving average and the S&P 500 head and shoulder neckline, and indeed, these can be very bearish signals. While every major trend reversal embarks with a trendline break, what often escapes most technician's analysis is the fact that there are also scads of trendline breaks that amount to very little when all is said and done, just to keep things in perspective. It is also worth noting that in the big bull run of 2003-2007 the $SPX spent a fair amount of time weaving around its 200-day SMA, which, while certainly a key level to monitor, is not always quite the definitive line in the sand its often cracked up to be. Nevertheless, recent action should have sent a strong warning to the bulls, and the charts now strongly suggest there will be more downside to come. Did a new bear market just get underway? While the market action has taken a very bearish turn, it is way too soon to draw that conclusion. Let's see how this correction plays out and how nearby support levels are handled before getting too firmly planted in one camp or another.

Trade well.

-- Brinkley
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