As can be seen from the chart below, the S&P 500 Index has been capped by resistance at the 950 level. As we said in earlier S&P 500 notes, we expect this to mark a high-water level for some time as we enter the seasonally weak period of mid- to late summer. How deep a correction we will get will depend on the ability of the S&P 500 to hold support near the 875 level.

The best-case scenario is we stay locked in a trading range between 950 and 875, while the more alarming scenario is we break back below the 875 region and have a deeper sell-off as part of a retest of the lows.

So far the rally has been aligned with the reality that the economy was not nearly as weak as many had anticipated. However going forward the market won’t get such an easy pass and just being “not as bad as expected” won’t fly.

So from an investment standpoint this new technical picture of the S&P 500 means curtailing trading activity on the long side, building cash (until the picture becomes more clear), tightening stops and possibly introducing some short exposure. Clearly the easy money has been made off this rally and now the market is taking back some of that easy money. Investors need to step back and reassess and not get sloppy.

Source: Kevin Lane, Fusion IQ, July 6, 2009.