Hold Onto Your Hat
The S&P 500 has broken below its two month trading range. Big things could happen.
CNN/Mone/by Justin Lahart/August 6, 2003: 8:26 AM EDT
Until Tuesday, the S&P 500 was locked in one of the tightest ranges have seen in years. Now that it has fallen below it, the talk on Wall Street is that stocks may be in for a very tough time.
It's hard to tell whether the chatter will be right, but one thing seems clear: Whichever way the market moves now, the move is going to be big.
From June 4 to Aug. 4 the upper and lower bounds of the S&P were narrowly defined, with the index never closing higher than 1011.66 or below 974.5. Those two points represented, in trader talk, resistance and support.
Resistance levels are places where investors sell time and time again, and they tend to get stronger each time the market brushes up against them and falls back. Why? Because all the investors who didn't sell the last time the market hit the resistance level -- or, heaven forfend, bought near it -- feel regret about having missed their chance to get out. So they make sure to get their sell orders in.
Support is just the opposite, an area a raft of investors have come to believe represents good value. With the S&P's fall to a close of 965 Tuesday, support appears to have broken.
That's a bad thing -- it suggests that the investors who kept on buying when the S&P drifted down to 975 or so have been overwhelmed by the sellers. Or, worse, that they've become sellers themselves, no longer believing that buying stocks at 975 is such a good deal.
So, is the market about to treat us to one of its dramatic interpretations of the lemming? Not necessarily. Technical analysts emphasize that lines of resistance and support shouldn't be drawn with a mechanical pencil, but in a thick magic marker. Moreover, the traders in Chicago who deal in the S&P futures appear to be keying off a level of 960 on the September contract -- a level that so far appears to be holding.
"A lot of people have been watching that," said Todd Clark, managing director of listed trading at Wells Fargo Securities. "That looks like the line in the sand."
Clark also pointed out that a number of players appear to have been betting on the market breaking down in recent days by buying put options on the S&P. When too many traders bet on the market going one way, it often goes the other.
Up or down, investors should put their helmets on. The two-month band that the S&P 500 just fell out of was as narrow as the index has traded in during the last seven years. In the past, whenever the S&P has broken out of such a tight trading range, it has started swinging violently.
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