Technical Analysis and the S&P 500

A lot of our subscribers have been asking us, where does the S&P go from here? Good question since the nearly 40% rally witnessed over the past few months has started to show some signs of fatigue. The chart below is of the S&P 500 and I've annotated it with some buzzwords used in the technical analysis community that I thought I would explain. The long purple line is the 200-day simple moving average. That's basically a rolling average of the last price of the S&P 500 over the past 200 days and often represents a long term trend line. You will notice that it was sloped sharply down - which is no surprise given what has happened in the market over the past year - but has started showing some signs of leveling off. That is a key point when trying to look at the longer term trend. If you are bullish, you want to see this moving average level off or start to slope upward. Back on June 1, the S&P finally was able to get back above this 200-day moving average. Technical analysts consider that a very bullish occurrence. But when that happens, the bears say "enough is enough" and start to try and push the market lower. This starts the test phase. The 200-day moving average had been a resistance point for a while and once you cross above and stay above, that resistance then is tested to see if it can now become support. I've highlight the first time sellers came into the market and tested it back on June 22nd. You will notice that the S&P passed the test and was able to hold and rally for a few days. As is often the case, once is never enough and we are just now testing that average for the second time. Bears will want to push the market back under that moving average and try and keep it there. The longer the S&P stays below that moving average, the more susceptible it is to further selling pressure. This second test created another set of issues for the bulls. After the first test, the S&P reached a top of just under 932. That is less than the top made on June 11th of 956. That "lower high" is often a sign that the trend is moving lower. You will notice that on the way up, the S&P kept making high highs and higher lows, thus maintaining that upward trend. So this first lower high and lower low is a sign that things may be changing. Also, you may have heard of the technical pattern called "Head & Shoulders". It's called a Head & Shoulders pattern because it is shaped like a person's head and their two shoulders. I thought it would be worthwhile to illustrate a recent example of this. I have labeled the left shoulder, the subsequent head formation, and now this most recent right shoulder which is trying to form. This is considered a bearish technical pattern and can signal a reversal in the market. The neckline which I have highlighted is a key level to watch as a break below there would complete that right shoulder and give the bears further ammunition. So, here we are. The battle at the 200-day. After such an impressive 3-month rally, the bears are taking a stand. We're seeing some bearish technical signs beginning to percolate and the bulls are going to do their best to hold this market up starting today by spinning Alcoa's quarterly loss as a positive sign that things are turning for the better. The next few days and earnings reports will be critical. Will the market shift from "things are not getting worse" to "things are looking good"? The bulls hope so, as that is the only time when companies will start ramping up production and start hiring again. I will close by noting that SmarTrend called a Downtrend for the S&P 500 two days ago at 890. After being in an Uptrend for 116 days. Once of the longest Uptrends in quite some time. Is it time for that retracement many have been waiting for? Or is this rally not over yet and we're just doomed for sideways action for some time (trend trader's worst enemy)? What do you think? sp500