The S&P500 (850.75) fell by another three percent yesterday, and is now just two points above its October 27 low at 848.9. We think it is vital to assess the likely outcome of this level either breaking or holding. A close below 848.9 would mark a fall to the composite's lowest level since March 2003. The S&P500 is now down by 42% year-to-date, not far off Wall Street's record fall of 47.1% in 1931. We think that a close below 848.9 would see a big rise in technical selling and result in the next sharp downleg, taking the composite to 2002's low at 777 (or 776.8 to be exact). Coincidentally, this would push the year's losses to exactly 47.1%. According to the ultra long-term proxy data we hold for the US stock market, 1931's 47.1% fall is the biggest annual drop since records began in 1825. We'd expect 2008 to match this record if support at 848.9 breaks. No small feat and sufficient reason, we think, to remain risk averse to, and fearful of, world stock markets. This will remain the case until the strong, prevailing downtrends are broken, whenever that may be. On the other hand, we believe maintenance of support at 848.9 is what should matter to the bulls. If support at 848.9 does not break in the next few sessions, we'd expect a small double bottom at circa 849/850. In this case, we'd expect a rally to the top of the current range at 1006 - that's near-term strength of more than 20%. As we expect world stock markets to keep following Wall Street, our technical advice is to watch the 848.9 level on the chart of the S&P500.
