an tSionna {11.08.11}

Somewhat busy longer term chart of the S&P 500 ETF {symbol SPY}.  That main horizontal line we've highlighted above in blue runs around 126 on the SPY or 1260 in the actual index.  It is a very important reference in our work.  First it represents a level from where stocks first broke out in 1998 while on their way to a final speculative blow out at the end of the last bull market.  That line also performed the same function back in late 2005 when stocks began their final move up before their collapse in late 2007.  It is also from this level where stocks collapsed back in 2008 and also this summer.  You can see in the chart above how this level has acted as both support and resistance this year.  So far in this current rally which began in August we've had one attempt to move through this level which failed.  Based on  premarket trading we're poised to attack this level again today.  We'll garner clues on the market's health by how we react here in the coming days.

Bu the way there are huge differences in valuation between the previous periods when we've approached 1260.  In 1998 when we first reached these levels the S&P 500 had a price earnings ratio close to 20 times earnings.  In 2006 the index carried roughly a 16 PE.  Today that PE ratio on expected 2011 earnings is closer to 12-13.

*Long ETFs related to the S&P 500 in client and personal accounts.