First Test Of The Breakout

06/03/09 2:15 PM EST

The S&P is approaching an interesting point as it trades down a couple of percent on the day.

We discussed last week how a break out of the range would likely be a false move, and now we're getting the first real test of whether the buyers have enough of an interest as prices come back to the breakout level.  920ish is a general line in the sand, which closes the gap from Monday morning and is also approximately the 200-day moving average (not that I think that's such a big deal, but others watch it).

The intraday indicators are nearing a level that would support a bounce as well, with the STEM.MR Model at 64%.  That's not quite to extreme levels but should get there if we continue to meander lower into the close, as the model is moving quickly towards oversold (it's designed to do that during strong trends).  If it would happen to reach oversold and the market doesn't rally over the next 1-3 days, then that would be a definite cause for concern.

The Price Oscillators are oversold as I type, at 38%.  This is the most stretched to the downside they've been since we bottomed on May 21st.

We're finally seeing a rise in put/call ratios.  The Equity-only ratio from the CBOE is on track to register its most extreme reading since April 20th.  Still not excessive pessimism by any stretch, but one of the higher readings we've seen during the past couple of months.

We're seeing some of the classic signs of a trend day, which tend to close at or near the lows of the day, so that would argue against a strong rebound before the close.  If we do meander around these general levels or a little lower, I'd be surprised if we don't get a bounce on the first test of this general area.  If the S&P fails to hold 920ish, then I suspect we're headed back down to the bottom of the prior range during the coming weeks, towards 875-880 again.