The market continues to be an oversold condition, but the longer we go sideways, the more viable another breakdown is.
The S&P 500 has gone back and forth during the trading session on Thursday to show signs of hesitation, and therefore it’s likely that the 3800 level is going to continue to offer short-term assistance. Quite frankly, the market looks as if it is trying to consolidate in this area, and therefore we may not get the massive relief rally that was possible. After all, we don’t necessarily need to balance, sometimes you can go sideways in order to work off excess fraud.
If that’s going to be the case, if the market were to break down below the 3650 level, then it’s likely that the market is much lower. In that scenario, the S&P 500 is more likely than not is going to go down to the 3500 level, as a futures market certainly looks very negative. However, it’s also just as possible that we turn around and show signs of life, and if we can break above the 3850 level, then the futures market may climb to the 4000 level.
The 4000 level is an area that not only is a large, round, psychologically significant figure but is also where the 50 Day EMA is racing toward right now. That would be a nice little rally and could get sellers coming back into the market. It’s difficult to see this as a market that should be rallying anytime soon because quite frankly the fundamentals are still very weak, and it’s likely that the monetary policy coming out of the Federal Reserve is going to continue to be tight as well. As long as monetary policy continues to be very tight, the idea is that we will see stock suffer as a result.
If the market were to break down below the 3600 level, I think that will bring in fresh selling, and therefore kick off more of a bearish move. On the other hand, it would be easier to short on signs of exhaustion after a rally, because it gives you more “runway” to work with. The market is not bullish until we break above the 4200 level, on the daily chart at the very least. If that were to happen, then obviously the momentum in the market would be to the upside. The market continues to be an oversold condition, but the longer we go sideways, the more viable another breakdown is.