The market started off on a good note Wednesday but was singing the blues by day’s end. It was much of the same old story as the market struggled to hold Tuesday’s gains. After starting the week off at 11,232, the Dow tried to get back over 11,500 and did, briefly, before falling 236 points to end the session at 11,147.

I have been mentioning key support levels that have been broken and it now appears the Nasdaq and S&P 500 have officially joined the Dow. For the Dow it was 11,750 which fell June 26. For the S&P 500 it was 1,275. After flirting with that level for the past week, yesterday’s drop of 29 points put the S&P at 1,244. The Nasdaq needed to hold 2,375 and then 2,275. Today’s drop of 60 points was like a canon ball going through paper and put the Nasdaq at 2,234.

It could get ugly if you are a bull. A quick look at the charts tells me if the Dow falls below 11,000 then we could be headed to 10,000. The S&P will need to hold 1,200 or else we’re looking at 1,100. For the Nasdaq, if 2,200 is broken there is support at 2,000. This would put the indexes at two-year lows. If the two-year support levels are broken the bulls will throw in the towel.

I don’t think, and that’s a big think, that the market will fall below these levels but all we need is one more major blow or an unexpected curveball to send the market into a tailspin. I think the best case we can hope for is that we get a rally come August/ September that will take us through the Presidential election and maybe into a “Christmas Rally”. That’s still a lot to ask for either way you slice it, especially with the volatility we’ve been seeing.

What seems to be working is riding hot sectors higher and jumping aboard stocks that continue to get hit with bad news. Any option positions taken should be carefully guarded and stops of even 10%-20% should be set regardless if you are long or short the market. The average investor doesn’t understand bear markets and I don’t mean that in a bad way. But just like bull markets where people make money when the market goes higher, people that know how to make money in bear markets are enjoying the current action.

Rick Rouse
Rick@OptionsMentoring.com