Traders Are Starting To Worry That The S&P Has Been Living A Dream For Months

Traders are starting to wonder whether the S&P 500's breakout above 1575 (its 2007 high) was just a drill — a 'false breakout.'

The S&P hit the high in April, and there was talk of a false breakout then, but the index just kept climbing, and everyone forgot to be scared in the middle of the party.

Then, last Thursday the S&P started its dramatic descent back toward 1575. Now, in this morning's market culling, the index is at 1561.

"It was all a dream..."

All this is almost the equivalent of saying the market's been living a fantasy for the past couple of months, and now in the midst of all this crazy news from around the world, it's coming back to reality. Traders are starting to get worried.

Take Enis Taner over at Risk Reversal, for example. He wrote in a note this morning that he believes the market has been "running on fumes" for months. Maybe other traders have been preparing for the correction that could be coming (or is here) — either way, this spells volatility.

From Risk Reversal:

Considering how many traders were watching this breakout level 3 months ago, I am confident that a lot of long-term positioning was based around the breach of 1575 to the upside. A push back below could trigger a lot of long-term sell stops. As is customary with markets, this important long-term level coincides with a very jittery international market backdrop. Should be another volatile week, to say the least.

As the old trader saying goes, from failed moves come fast moves. If 1575 fails, buckle up.

That said, this all could be a technical blip, meaning the dream lives on.

Watch the plunge in the chart below (via Yahoo Finance).

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