S&P rally seems to be over…for now.

Well, we’ve had it good for a couple of months now. The markets have run up somewhere around 15%, the elections are out of the way and QE2 is no longer a mystery. As a matter of fact, it would appear that the markets expectedly rallied in anticipation of those elections and the QE2 announcement. So, a pullback was probably to be expected. The question now becomes: How far will we pullback, or will a pullback turn into something bigger?

I decided to put together a quick update on levels to pay attention to on the S&P here in the short run. Please review the chart below with my notations:

As you can see, the S&P has recently broken below its trend line of support. The next level to watch would be the 1197-1200 area, as shown on the chart. If we break that level as well, I’d expect a fall to at least the 1150 area.

Also, do not forget my previous newsletters in regards to the stock market’s correlation to the dollar and commodities. If the dollar and commodities gain momentum in their most recent turns, the stock market could sell-off more than the typical pullback that is expected.

The Tale of the Tape: After a great run in the markets, a pullback appears to have started. The S&P has already broken one key level of support and seems to be preparing to break another in the 1197 area. If that level breaks, expect lower prices. Watch for stocks to pull back to lower levels of support for new entries in long positions. Possibly enter short positions depending on the extent of the selling.

Waiting for the most opportune times that I have outlined above could provide you with higher probability entry points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT