My How Things Have Changed With the S&P

By Rick Pendergraft

I have written several articles over the last couple of months about the chart of the S&P, but things have changed now. The lower rail of the trend channel and the 200-day moving average both gave way on Friday.

In all honesty, I thought we were in the clear on Wednesday when the market rallied sharply in the last half hour to close in positive territory. The market had spent most of the day in negative territory and the S&P spent a good portion of the day below the two trendlines on the chart below.

When the market rallied back and we saw record volume on the Spyders, it looked like a bounce was in order. But after a mild rally on Thursday, the markets had a meltdown on Friday. Several factors led the market lower on Friday, and this time there was no ninth-inning rally to save the day.

A worse-than-expected employment report, including a rise in the unemployment rate, and a very negative conference call with Bear Stearns led the market to a huge drop. But the most important question is, where do we go from here?

I would not be jumping into puts just yet, given the oversold levels we have reached. But I would look for the S&P to rally back up to the lower rail of the trend channel and the 200-day moving average and then look to buy puts. A jump back up to these trendlines, if they take a few days rather one big jump, should take the indices out of their oversold levels.