S&P Entering Week of February 1
The S&P 500 Index (SPX) has experienced a couple of disturbing technical failures the past two weeks. First, after a few attempts to overcome its important 160-month moving average, the SPX failed to break through. The 160 month moving average is situated in the 1,150 area and acted as support at the 2002-2003 market bottom.
A monthly close above this trend line would have been a very important step in establishing whether or not the market was ready to return to a bullish mode.
And secondly, the SPX broke below its 80 day moving average for the first time since the March 2009 bottom, [see CHART], which represents a huge negative for the bulls. This intermediate-term trend line acted as resistance on rally attempts during the last seven months of the 2007-2009 decline. A crossover above this trend line in March 2009 proved to be a major “buy” signal, and pullbacks to this moving average in July and November 2009 were excellent buying opportunities. The SPX has now closed below its 80-day moving average for six consecutive days, and has resisted attempts to close back above it in each of the past five days.
As negative as these factors are, the bulls may have some glimmer of hope going for them amid this weakening technical backdrop. One is the possibility of a pattern that occurred in September, October and November of last year. Explosive rallies began at the start of all three months. In each of these cases, the rallies followed roughly two weeks of declines that ranged between 4% and 6%. At present, the SPX has retreated about 6.5% from the peak highs observed a couple weeks ago.
The bulls may also have something to look forward to in the coming weeks as the nine-day relative strength index (RSI), [see LOWER section of chart] comes into this week at 26.75. The RSI is a short-term measure of overbought and oversold conditions. This 26.75 reading is the most oversold the SPX has been since March 9, 2009, when the nine-day RSI reading was 23.55.
*It is important to note that oversold indicators can stay oversold. In a bull market, stocks should advance strongly from “oversold” conditions. To the extent that they cannot, the possibility increases that the lows have not yet been reached.
As I stated above, there has been a bullish tone lately when beginning a new month of trading. Amid signs of increasing fear and an oversold condition, this combination sets the stage for a S&P 500 bounce into resistance around 1,100. But take note that the technical backdrop has deteriorated relative to the other pullbacks that we have witnessed during the past several months, suggesting there is more risk in the market now. Therefore, while evaluating these mixed messages it is vital to keep your long positions protected with “stop loss” orders.
Short-term resistance for the SPX is in the 1,100 to 1,110 range. The 1,100 century mark has been important going back to October, and the aforementioned 80-day moving average is sitting at 1,099.10. Support is in the 1,040 area, site of the lows in October that preceded the November advance.
