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S&P 500 gaps down - confirms bearish outlook

Yesterday I wrote a post describing my opinion on the direction of the markets. I focused on the S&P 500 and, after reviewing the chart situation, came to the conclusion that the most likely direction was down.

Today we opened with gap to the downside and the index never recovered. The gap is clearly visible in the chart below which shows what happened to the S&P 500 SPDRS (SPY) ETF.

Chart of SPY. Click to view larger image.Shortly after I saw the gap, I decided it was time to nibble on a few shares of the ProShares UltraShort S&P500 (SDS) ETF. Purchased at $55.13, SDS closed today at $56.08 for a quick little 1.7% gain.

The chart now looks worse than it did Friday. Today's sell-off came on decent volume but not extraordinary volume. This implies we have not yet seen the kind of capitulation that marks a bottom. Note also how the MACD on the chart above is on the verge of confirming the bearish direction. It looks like SPY might have a bit further to fall.

Disclosure: author is long SDS
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June 5, 2008 at 12:08:00 AM EDT

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