S&P 500 Closing in on a Key Technical Support Level

With the US equity markets in seeming free fall today, there are some things worth pointing out here as well.

First of all, take a look at the horizontal red and blue lines shown on the weekly chart. Look first at the lower red line. Back in August of last year, rumors began to surface that the Fed was going to embark on another round of Quantitative Easing. The reason - the first round had apparently run out of impact. Yes, it had halted the collapse in both equity and commodity prices associated with the unwind of the carry trades on the heels of the credit crisis eruption, but when it came time for it to expire, the equity markets had nothing else to drive stock prices higher and began retreating.

Also, economic data had begun to once again deteriorate. The result was that the stock market dropped in April 2010 and then moved sideways almost as if hanging on by a mere thread as it attempted to force the hand of the Fed for the next dose of liquidity. The Fed did oblige and that took the index on a several month long rally that peaked shy of 1400 in early May of this year as the market anticipated the ending of the QE2 program at the end of June.

Since that time, look at what the S&P has done - it has completely erased the entirety of its gains associated with the actual implementation of QE2. Another way of stating this is that the effect of the gargantuan sum of $600 billion in Treasury purchases and $300 billion for Agency Debt has been utterly wiped out. We are now back to levels commensurate with rumors of the QE2 program began surfacing.

When one considers the fact that we just witnessed a month in which ZERO new jobs were created on a net basis, you can reflect on the enormity of the wasted effort.

Perhaps that was in the mind of the Fed yesterday when they announced a sterilized Treasury purchase program of $400 billion. Either way, the markets are not at all happy.

What is more ominous however is where this market appears headed. Tomorrow's close is going to be extremely significant from a technical perspective. Note that the S&P has not yet CLOSED below 1100 on a Weekly basis. It did violate that level in early August but recovered to end the week well above this key level.

If the bulls cannot quickly muster a new effort, and we get a weekly close below 1100, it would put the index on a course for a push into the level just below 1050. Below that there is nothing on the chart until you get closer to 1000.

What I am taking away from the price action thus far is that traders right now feel no reason whatsoever to step in front of this market to buy stocks. There may be some who are calling them "cheap", and that might be true, but some are looking for them to get even cheaper before they consider buying. With nothing seemingly happening on the European front, with Chinese growth numbers a bit lower and with the Fed having fired off its gun, what else is left for the market to rally on at this point is the current line of thinking.

Let's see what we get in tomorrow's action.