- Technical Commentary -

October 2, 2009 (FinancialWire) (By Frank Kollar) — Two weeks ago we wrote that there were major hurdles ahead for the stock market. Both the S&P 500 Index (SPX), and its tracking ETF the S&P Deposit Receipts (NYSE: SPY) were testing the 50% retracement level for the May 2008 through March 2009 declines.

And just above that is the 50% retracement level for the entire bear market decline, so the odds of making new highs in coming weeks were small indeed.

As expected, the SPX and SPYDRs hit a wall. Volatility dramatically increased this week and on Thursday, October 1, the start of the last quarter of the year, the SPYDRs reversed hard to the downside.

How far down do we go? There is no way to know, but there are support levels that can be watched. The first is the 61.8% retracement for the September rally at SPY 102.82. That is only a fraction below Thursday’s close and unlikely to hold.

The next is the September 2 correction low at SPY $99.58. Watch for a reversal and potential bullish trade setup. A decisive close below $99.58 would point to a test of the 50% ($95.04) and 61.8% ($97.53) support levels for the July through September rally.

The stock market has been overbought for some time. A correction needs to erase some of the bullishness in order for the advance to resume.

If we do move lower, initial strong support should be found around SPX 848 which is the 50-day moving average for this big cap index (for the SPY the 50-day moving is at about $85.00).

(The http://www.fibtimer.com ETF Strategy has a position in the S&P 500 SPYDRs.)

[Go to http://www.financialwire.net/?s=frank+kollar to see more commentaries by Frank Kollar.]

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