Crossing the 4200 line

The S&P 500 at 4200 (or the SPY at 420) has been considered the line in the sand to define whether we will go into a deeper downfall than just a small correction. Yesterday, we crossed that line. We have come close to breaking that line in the recent past. But have bounced back. Not this time.

We have a number of headwinds as discussed on CNBC and Bloomberg. I do think that the earnings releases and the commentary by companies around their future earnings is what finally made the markets succumb yesterday.

All the headwinds are the causes, not the reason why stock prices fall. Stock prices fall because of impending harm to the earnings potential of the companies whose stocks we trade. While all the headwinds have been there for a while, we have been witnessing companies being able to weather these headwinds so far. This time the commentary around the earnings seems to have changed.

Note that most companies are still meeting or exceeding their earnings estimates as set by the market analysts or the companies own guidance from the past. It is at the Q&A and the commentary that the future lines in the sand are set.

What you have done for me this time is fine. But what are you going to do for me in the future? What is the valuation I should assign to your future earnings potential. That seems to be the issue.

Here is the SPY 1-year chart with my drawings/annotations:

There are 3 long-term unfilled gaps below, the final one at around -4.5%, and I think that is fair play. The downward parallel lines and the red line could act as support. If it does, I will pivot. But there seems to be a sense in the price action that the support will not hold anymore.

The VIX (Volatility Index) has been creeping up and, as I write this, stands at 21.48. That is somewhat elevated. But in March we had reached 30. So, there is a lot higher to go potentially.

Strategy

I am positioned short and will stay so until short-term indicators start reversing to the upside. But I am not going to be complacent. If price action reverses, I will be the first one to close my short positions. In other words, I am going to stay alert.