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A Warning Shot for the Bulls?

By: Sam Collins
Posted: 6/23/2010 7:45:00 AM
Referenced Stocks: ADBE;JBL;QQQ;SPX;SPY;VIX


Editor's Note: Sam Collins will be on vacation through June 25. Filling in for him are two other top technical analysts, Chris Johnson and Jon Lewis.

In a "normal" market, a two-day pullback in stocks is normal. In this market … it may be a warnings shot across the bulls bow. 

The market bowed to the sellers on Tuesday, as poor housing numbers set the tone for a negative day. The selling took out a few key technical levels that we'll discuss in a moment. The negative action took all 10 major sectors lower, with energy (-2.7%), utilities (-2.5%) and industrials (-2.4%) the worst performers.

Similar to last week's rally, Tuesday's selling took place on light trading volume as the SPDR S&P 500 (NYSE: SPY ) shares saw only 1 million shares change hands. The light-volume trading environment is something that traders will need to get used to as the economic calendar remains light until earnings season gets off to a start in a few weeks.

On the technical side, the S&P 500 ( SPX ) moved below three key technical marks.

First, the benchmark index's 200-day moving average. This trendline, currently at 1,111, has become one of the most widely watched trendlines lately, meaning that the drop below it (200-day) may draw the sellers back into the market in force.

Second, the SPX moved below the psychologically important 1,100 level on Monday, making today's market action incredibly important for the bulls. A move back above 1,100 during today's trading will prompt the technicians to break out some of the cash that has been sitting on the sidelines, especially as the quarter's end draws near.

Finally, the SPX broke below its 10-day moving average. This is the first move below this short-term trendline since June 9. Again, it will be key to see the bulls defend this trendline quickly in order to maintain the short-term bullish conditions that we have enjoyed for the last two weeks.

SPX Chart

The CBOE Volatility Index ( VIX ) popped back to life, jumping more than 8% to an interesting technical juncture. The "fear index" will start trading this morning just above 27, a hair below the intersection of its downtrending 10-day moving average and its upward trending 50-day.

What does that mean? Well, it makes the 27 mark much more likely to be a major inflection point for the VIX, meaning that the market will also see a large move based on the VIX's next move.

After the bell on Tuesday, Adobe Systems Incorporated (NASDAQ: ADBE ) and Jabil Circuit, Inc. (NYSE: JBL ) provided positive earnings results and guidance, which should provide a little fodder for the technology bulls. The PowerShares QQQ Trust (NASDAQ: QQQQ ) is trading just above its $46 level and its 10-day moving average. (Are you picking up a theme?) Today's trading will get the boost it needs from buyers as long as these levels hold.

So what's the rub? Today is what we often refer to as a "must win" technical day. The SPX will trade back to its 1,050 mark unless today's trading fills the gap from yesterday's losses. 

The light trading volume combined with the vacuum of economic data will create a vortex lower unless the current technical levels we've identified this morning hold true. Any lack of trading strength will act as a signal to begin buying put options to leverage what would be a third trip to the recent bottoms. 

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