-Dugald Malcolm

Montreal, Canada.

I am looking very carefully at the movement of the S&P today, specifically at the 1101 level, which is being flirted with as I sit here typing. That represents the high made back on October 21st and is the current level of resistance.

Back in late October I had become convinced that the rally was finally running out of steam. I had had very little faith in the rally up to that point to begin with, seeing as that the earnings multiples were becoming completely out of touch with the fundamentals and that all upward movements seem to be happening on very little volume. So, when I saw that the upward trend line that had been in place since March on the weekly charts had finally been broken (see chart below), I assumed reality had finally sunk into the market. Several consecutive down days brought the S&P 500 below its 50 day moving average and a downtrend seemed to be forming.

Even when the price movement turned around in early November, I still thought I saw a possible Head-and-Shoulders Top formation in the works. But again, as it had done before in July, the market pulled a successful about-face and surged back up over the 50 day moving and quickly ascended to the highs made back in October.

While the S&P 500 might very well be attempting to re-establish an upwards trend, it is poised to face a very significant hurdle. Since October of 2007, a downward trend line has been in place and has yet to be breached. The trend line, as seen on the chart below, is currently at around 1150, approximately only 4.5% from our current levels. If the market closes today above the 1101 highs made in October, the long term downward trend line will represent the next major resistance level and, therefore, should be closely monitored.

As Eric mentioned yesterday, hedging is a very important tool that helps you reduce risk to the downside and should be employed here. The higher this market goes, the riskier it becomes.