In every bearish downtrend there is a bounce. Since we are down 2% today in the S&P500, and have been in a downtrend, it's time to look for the bounce. I believe I have a possible scenario for this bounce that seems probable to me.
S&P 500 Daily
On this chart, support might possibly be found at the 100 day moving average which currently intersects with 850, a previous resistance level. We should arrive at this juncture before the week is through. Once there I believe we will bounce up and retest previous support, which is now resistance. This resistance level is near 880, or the 200 day moving average.
From there, a decline should happen that retests the support level that was just made. This location is marked as point "A" on the chart. I believe we will break through that support level to the downside, however, news might occur that changes the outcome to a bullish scenario. This is why 2 lines diverge from point A, a bullish scenario and a bearish scenario. I believe we will reach point A sometime next week.
Also, look at the MACD histogram. MACD already gave us bearish divergence to let us know a top was forming, but now we see momentum on the histogram is accelerating. Since I believe the bearish scenerio, I want to see that histogram touch or exceed that line just below it before the downside exhausts itself.
To support my bounce hunch, I'm looking at the VIX.
VIX Daily
The VIX has broken above a poorly defined downtrend line. It currently touches it's 50 day moving average, which I believe it will break above to the upside. Once it does this, there is a range of resistance in which it must navigate. I believe the bounce in the S&P500 will happen in this range on the VIX, and if the bearish scenario plays out, the VIX will likely make contact with its 100 day moving average.
My forecast here may seem dire, but it's a short-term view. I believe Doug Kass's comments that we could have a late autum or winter rally this year, and a decline now just supports that hypothesis even more. The key will be the jobless claims for July which will be reported in the beginning of August. If those claims are less than July's then a recovery in the next 8 months will be back on the table, if not, then the market could get pretty ugly in August.
Ultimately, whatever August's jobless claims are, we'll probably have to buy after those numbers are released. The reason being that if the jobless claims are good, the decline in July will have set us up for a rally. If they are bad, the decline in July will have another brief leg down in August, which will most likely form a bottom. You have to remember that back when we crashed, the financial world was over as we know it. Well it's not over and we're going to recover. That means the S&P500 is worth more than 800, and probably more than 850. Significant declines into that price range have to be bought based on the facts we know today. The facts may change going forward, but for now this is how it is.
Essentially, the market rallied more than 30% and it needs a pullback to go higher. The nature of that pullback will depend on information we learn in the next 2 to 3 months.
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