The SPX spiraling down?

The chart of the S&P 500 (SPX) has been trading in a channel with a decidely downward bias. [See chart below.] This is a bearish pattern and there are reasons to believe that the pattern will continue.

Why? For one, the topping tail on today’s mid-morning chart shows that the early morning buying pressure couldn’t be sustained, most likely due to negative housing and manufacturing reports.  Secondly, the market internals (as of this writing) are edging into the bears’ camp (rising VIX & Trin), but the weak VWAPs (a measure of institutional buying) is tepid at best on both sides, giving credence to the Sell in May and Go Away adage. (Or may be that traders just decided to spend an extra day or two in the Hamptons.)

So, how should one play this scenario?  If you haven’t bought portfolio protection, now is the time to do so.  More risk tolerant players may wish to purchase index puts on days where the SPX hits its channel high and shows signs of reversing course (like today). [Note: Set a mental stop/loss just above the upper channel level.] 

Support levels for the SPX are 1325 (minor), 1300 (major), 1280 (minor), and 1250 (major).

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