1100 or 1040 is the next support levels for S&P500

It was a surprised to me and many other analysts when we heard Standard & Poor's downgraded the U.S. sovereign debt rating to " AA+" after market closed on Friday August 5Th. I was looking to downgrade sometimes in September but they jumped the gun! they didn't give any chance to the super committee to come with their plan. S&P had threatened if republicans and democrats fail to come up with 4 trillion cuts they are going to downgrade the U.S. credit rating. China's Dagong Global Credit Rating the biggest Chinese rating agency had downgraded U.S. several times in the past. The latest assault of the U.S. credit debt rating was on August 3rd 2011 from "A+" to "A" with a negative outlook. The only positive point is that Moody's and Fitch did not downgrade us yet!

If you did not go short you missed the boat. I'm getting ready to cover my shorts and get ready for possible bounce. S&P500 could get a bounced from 1100 or 1040. What you should pay attention in coming weeks would be 1200-1211 resistance levels. If S&P500 fails to get above 1200 I will add to my short positions. As you see in the chart above 1200-1211 coincide with 20 months moving averages (see the chart green lines) as you see in the chart S&P500 clearly broke the uptrend channel. It also violated the 20 SMA in the monthly time frame. Similar action in 2008 resulted a bear market. I also may play the long side if we get the dead cat bounce from 1100 or 1040. This is base on similar action was taken in 2008 after initial channel violation. Please note that S&P500 could spend the next couple months in a range 1040 to 1200 levels, which would be very bearish.

S&P500 broke the up-trend channel, is it a fake out?

I was looking for a bounce, when S&P500 reaches the lower side of the up-trend channel(see the chart above in gray), but instead big institutions decided to sell! I bought some shares yesterday near close at 1254. We will see if I get it right. I would get out if S&P500 violates 1246 support level(see the chart in red) .

Bullish scenario: There is a good chance that this move was a fake out, just to shake the weak hands before sending the market higher. If S&P500 fails to get back into the up-trend channel it would be signal of starting a new bear market. That this point I would give the benefit of the doubt to bulls, but if S&P500 fails to get above 1340 by third quarter it means good days are over and we are back to the bear market.

Bearish scenario: If S&P500 violates the 1246 support level there won't be any supports until it hits the 1200-1188 level. In this case we could get a "Dead cat bounce" from 1200 or 1188 which should ended somewhere near 1246-1260. If S&P500 fails to get back above 1246, I would consider putting my bull mask away and jump to the bear wagon. At this point it's too risky to go short, I would wait to see how big institutions are going to react to in coming "Dead cat bounce". If they managed to squeeze the shorts and send S&P500 above 1260 you can go long ,but if S&P500 rallies up to 1260 and fails to stay above it, I'll become the big bad bear once again,and will short any rallies.