After Geithner's new plan was released the market quickly sold off and with heavy volume. By midday all three major market indices were trading down over 3% and by the close the S&P 500 finished down 4.91% closing at 827.16. 800 is the key support level for the S&P.
The problem heading into this week was clearly over hype for the new bank bailout plan's announcement. Last Thursday and Friday the market rallied even with the terrible jobs report. Yesterday (Monday) the market closed flat with little intraday volatility suggesting today would be a active session one way or another.
Our post on the CBOE Options put call ratio last week which was featured on Wikinvest.com today further illustrated the bullish sentiment that was over embellished.
When it comes to investing in the stock market extreme sentiment almost always foreshadows a reversal. This is true on both the upside and downside. Many investors believe the time to buy in a bear market is when the bearish sentiment is at its peak.
Back to today's action, below is a chart of the S&P 500. Several key points stand out:
- The index never made higher highs above 877.86.
- The index could not close above its 50 day moving average and once again is back below.
- The index is now trading in what has formed to be a new horizontal channel.
A close back below 800 should easily send the index back down to test the November 2008 lows.
