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Will Market Fail at Level That Lehman Did?

Thursday, 15 Apr 2010 | 11:34 AM ET

Having blown through 1,200 this week, the S&P 500 faces a stiffer challenge than just a round number ahead. On Sept. 12, 2008, investors went into the weekend uncertain of how the Lehman Brothers situation would be resolved. Traders sent the S&P 500 as low as 1233 during that volatile and confusing Friday, with the index ultimately rallying back to close at 1251. That Monday the S&P 500 would dive nearly 5 percent, as Lehman declared bankruptcy.

But now, the benchmark for US stocks stands just about 2 to 3 percent away from those levels, the last chance investors had to get their money out before Lehman’s collapse lit a fuse to the market collapse. This may trigger more than just bad memories, traders and analysts said.

“Human nature is to be made whole,” said Carter Worth, chief market technician at Oppenheimer. “The presumption, therefore, is that considerable ‘memory’ comes into play here at the 1200-1230 level and that there is a great deal of supply likely to hit the market as people sell, having recouped losses from the worse Bear market of a generation.”

Right now investors don’t seem to be trudging up those bad memories, pushing the S&P 500 higher 11 of the last 13 trading days after strong earnings from JPMorgan Chase and Intel.

“We’re still seeing a lot of buying across the board,” said Steve Grasso, a Stuart Frankel trader at the New York Stock Exchange. “But keep an eye on pre-Lehman marks because it’s a big emotional level for market professionals.”

Where the S&P 500 is right now also happens to represent a more than 60 percent retracement of the bear market’s total losses, a level that chart analysts keep an eye on based on the historical track record around this mark and technical tools like Fibonacci, according to analysts at Brown Brothers Harriman.

They believe the market may have the strength to break through this key level even after a short pullback. “We are in the midst of an ongoing bull market and we therefore recommend using any significant dips as buying opportunities,” wrote Brown Brothers analysts Ari Wald and Scott Davies in a note this morning.

Investors may get their chance for that dip soon, according to Joe Terranova, chief market strategist for Virtus Investment Partners.

“Historically the first challenge to these key resistance levels always fails so selling versus 1230 in the S&P 500 makes sense,” said Terranova, also a ‘Fast Money’ trader.

For the best market insight, catch 'Fast Money' each night at 5pm ET on CNBC.

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Trader disclosure: On Apr 15, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (C), (INTC), (MSFT); Grasso Owns (C), (AAPL), (BAC); Terranova Owns (AXP), (HES), (TER), (APA), (YHOO), (MOS); Terranova Is Short (LCC); Terranova Is Short (BRE); Terranova Owns (C) Calls; Terranova Owns (GOOG) Calls; Terranova Owns (SONC) Puts; Seymour Owns (BAC), (AAPL), (EEM), (INTC), (MON), (MGM), (MGM); Seymour's Firm Owns (POT); Seymour's Firm Is Short (X); Najarian Owns (BAC) Call Spread; Najarian Owns (C) Calls; Najarian Owns (CLF) Call Spread; Najarian Owns (GOOG) May Calls, Short April Calls; Najarian Owns (GE) Calls; Najarian Owns (PCX) Call Spread; Najarian Owns (MOS) Call Spread; Najarian Owns (SUN); Najarian Owns (YHOO) Call Spread; Najarian Owns (TCK); Najarian Owns (F); Finerman Owns (GOOG), (AAPL), (RRI), (BAC), (YUM); Finerman's Firm Is Short (IJR), (MDY), (IWM), (IYR), (SPY); Finerman's Firm Owns S&P Puts; Finerman's Firm Owns (JPM); Finerman Own (JPM); Finerman's Firm Owns (GLW); Finerman's Firm Owns (BAC); Finerman's Firm Oww (BAC) Preferred; Finerman's Firm Owns (WFC) Preferred; Finerman Owns (WFC) Preferred; Cortes is Short (LVS) & (WYNN); Cortes Owns (GS); Cortes Owns (MS); Cortes Is Short S&P Futures ; Kinahan Owns (C); Kianahan Owns (GE)

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For Steve Grasso
Stuart Frankel And Its Partners Are Short (AAPL)
Stuart Frankel And Its Partners Own (PDE)

For Eugene Profit:
Profit's Fund Owns (GE)
Profit's Fund Owns (GOOG)
Profit's Fund Owns (UPS)
Profit's Fund Owns (INTC)
Profit's Fund Owns (MRO)

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