Technical Analysis: SPX

Technical Analysis Summary:
-The SPX recently broke the neckline of a head and shoulder pattern
-This indicates that the stock could potentially go down the same length as the distance between the neckline to the head
-Therefore, if the SPX follows a head and shoulder reversal pattern, the price target should be between 900-925 for about the next two months
-The SPX is currently below both the 50-day MA and 200-day MA
-Furthermore, the 50-day MA is on the brink of crossing the 200-day MA, which provides further evidence that the SPX is heading down (note: the 50 MA has stayed above the 200 MA since the end of June 2009, so this crossing is significant)
-I would wait a day or two to see how the trend plays out. If the SPX does not make gains, then I would enter a short position.
-One way to hold a short position on the SPX is to hold the ProShares UltraPro Short S&P 500 ETF (SPXU)
-This ETF is triple leveraged, which could be useful if the SPX does not decline as much as the head and shoulders reversal pattern indicates
-Low put/call ratios in the past month for this ETF hint that investors are expecting it to rise

ProShares UltraPro Short S&P 500 ETF (NYSE: SPXU):

As of 7/1/10:
Current Price: 39.68
52 week range: 26.27 – 86.01
Average volume: 7.77M
Market cap: 333.31M
Shares: 8.4M

June 30: 328 put and 1,022 call contracts à 0.32 put/call ratio
June 29: 412 put & 1,281 call à 0.32 put/call ratio
June 4: 106 put & 1,266 call à .08 put/call ratio

Conclusion:
From a purely technical standpoint, the SPX looks like it is positioned for a decline. To be on the safe side, I would wait 1-2 days to see how the market plays out. If the SPX cannot produce gains within the upcoming days, then I would enter a short position. Ideally, I would hold the short position for about two months. However, with uncertain economic conditions, I would monitor my position from day to day and be ready to exit it if conditions are not working in my favor.

Daniel A.
Summer Analyst
Analyze Capital LLC