A little Background Logic Today

Here is a little behind the scenes logic today with the factors we see as important.  First, technical market action is crucial at market turning points.  At the moment the level of 1393 on the S&P 500 is a significant resistance level.  The market yesterday failed to penetrate that area, even on an intra-day basis, and sold off.  In that light yesterdays sell-off is not significant, just a back-off from resistance. 

From a bigger picture standpoint, that level could be of much bigger importance.  The spotlight on economy and the market is moving from sub-prime mortgages and financial company problems and now has to deal with the real end-product crisis, the consumer .  The consumer is  70 percent of the economy and the fact that they are cutting back on their activity is significant.  The first real reflection of that fact is right in front of us, the corporate earnings reports we started seeing last night.  While analysts look for profits to decline substantially,  what if they decline even more. 

That brings into play the risk reward equation at the S&P 500 price level of 1385, if the market goes higher it will run into big resistance at 1435, just 50 points higher.  On the other hand if the market starts down, there are a number of minor support levels, like 1335 and  1285, but if the 1260 low is breached, the next stop is 1120, 265 points lower.  As such at that level a big-picture risk / reward ratio of approximately  5:1 is facing every investor.

For the moment it is probable that at least one more run towards the 1385 level may be in the cards for this week, and then again maybe not, the best posture is being defensive in our estimation.