What's Next for the S&P 500?

The S&P 500 fell all the way to 700 today, which is support going all the way back to 1997. Clearly, financial sector problems, most notably the ongoing problems with AIG (where was Rick Sentelli's rage about the government's action today??), and HSBC, the largest European bank curtailing lending in the US, hurt markets in general.

In order to find the next support levels, go to StockCharts.com, switch to Weekly data, and to make things visible, enter a specific time period. I chose 1996 - 1997 to see things without too many small OHLC bars. In order to find the exact LOW for support, in Annotations, change the Info Mode of the Cursor (far button on top right of Annotation screen). Click two times until it gives the date and specific values for Open, Close, High, and Low when you move to a bar.

I did this and found the next two support levels for the S&P 500 (note: this is depressing, viewer discretion is advised), which is given on the following chart (click to enlarge). Next stop is 644, which is a pretty significant drop from today's level. After that, the next support takes us almost to 600 (at 606).

To determine whether we will likely hit either of these support levels, once again use economic analysis. The primary determinants of stock price at present are proft expectations and the perceived safety of the financial system.

Considering just these factors, we go 0 for 2, so the likelihood of reaching 644 suddenly becomes very significant. But at times like this, don't forget the psychology of markets.

A few weeks ago, many of the "talking heads" were saying it was time to get back into the market. Recall, my advice at that time was to get out quickly if you had money invested. Now, there is almost total resignation that a sharp drop is inevitable. Being a contrarian, I see the potential basis for a short-term bear market rally. So, barring any more horrible news (remember we have the employment report Friday), we might move up shortly.

The initial claims news on Thursday will probably bring more downward price pressure so it is not inconceivable that after a very bad employment report on Friday, we have an initial downdraft followed by a short-term rally. Think about it for a while: if a rally were to occur, when would most people be fooled? Answer: Friday after the employment report. This is only one possibility. Let's see how things actually play out for the rest of this week.