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Gleaning the Clues - What’s Next For the Market, S&P 500?

Friday’s close of 1064.88 was the worst close of the year for the S&P 500. While it’s still a little soon to say the long-term support line (red) has been broken, it’s easy to say it’s under a serious attack. A couple more days of this, and it will snap.

What’s interesting about this chart of the SPX - and the VIX - is that while Friday’s net loss was stunning, neither volume nor fear seemed to be that dramatic.

Oh, there was some selling volume to be sure, but we’ve seen worse within the last few weeks (even aside from the flash crash). The same goes for fear. Though the S&P 500 closed at new lows for the year, the VIX didn’t even come close to new highs.

This tells us one of two things….. either traders really aren’t as worried as Friday’s implosion would have you believe, or, traders are just really, really naive about how vulnerable the market is to more selling. The likely two outcomes of these scenarios are not just diametrical opposites, but extreme opposites.

The bears will quickly (and rightfully so) point out that the 200-day moving average line (green) appears to be a resistance level. The SPX knocked on the door several times over the last two weeks, but never cleared it. Not good.

Take a look at the chart of the SPX, but then take a look at a chart of the NASDAQ, which strangely doesn’t quite tell the same story.

S&P 500

S&P 500 - 06/06/10

S&P 500 - 06/06/10

NASDAQ Composite

The S&P 500 may have never gotten itself up off the mat after the late-May bottom, which is why it so easily found new lows for the year on Friday. The NASDAQ, however, is still well above its long-term support line (red), and still nowhere close to it’s lows for the year. In the bigger picture this is bullish news, given that the NASDAQ tends to lead the other indices, both up and down.

And like the S&P 500, the NASDAQ’s volume and its Volatility Index (the VXN) didn’t show a commensurate degree of fear or selling volume either. In fact, the NASDAQ’s VIX and volume on Friday were explicitly undramatic. Again, it points to a very confident or very naive view of the market right now.

You’ll also see the composite did fall under its 200 day line. It’s still way too soon to say it’s trending under it though - it’s been above and below it several times over the last three weeks. In the NASDAQ’s case [which is the index we're really watching now for bigger market clues], more downside is not a forgone conclusion.

NASDAQ Composite

NASDAQ Composite - 06/06/10

NASDAQ Composite - 06/06/10

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More Stories By James Brumley

James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.