S&P 500 Chart – Is the Dream Over?

I charted the S&P500 ($SPX) after the markets closed on Friday, October 30, 2009 when the SPX finished the month at 1,036.19.

Depending on the line you draw, it could be that the rally (aka ”Dream” according to some) has ended with both short and long term trend lines of higher lows breaking on Friday.  The questions that remain are how much of today’s price action was related to end of the month clean-up for the mutual funds and other large players and was this an overshoot of panic that won’t last.  A break like I’ve highlighted in the chart below can be a big signal that a rally’s legs are tired.  The first clue came on Wednesday when the S&P 500 closed below its 50 day moving average for the first time in months.  Thursday opened up below that same moving average too, but we quickly recovered to get some of us to think we escaped the end with only a few scratches and bruises.  Even as the markets opened on Friday there seemed to be hope that we’d stay above the 50 day moving average, but that hope was soon crushed. 

In my SPX chart a few weeks ago I pointed out that the index hit resistance at its upper trend line of higher lows.  As you can see in the chart below the lower trend lines of higher lows were starting to get close to the upper trend line.  Eventually one side had to break.  I expected/hoped to see the lines get a little closer before the break came, but you can see that the lower lines gave in first.  The only line I could come up with that might offer support close to Friday’s close is the intraday low from October 2nd of 1,019.95.  That’s also within a rounding error of the high from August 7th of 1,018.00.  I wouldn’t be surprised to come within five points of that line before turning back up.

If not a straight line to help the SPX turn, it could be down to the 100 day moving average that’s crossing the 1,000 mark.  If the SPX heads below the 100 day moving average, the 200 day moving average could come into play another 8-9% lower.  I don’t really expect the S&P 500 to go back down there too soon, but it has to be noted as a possibility.  Even last week on my Dow Jones chart I noted the pull of the 200 day moving average wouldn’t let the index get too far ahead of itself.  This week showed that to be true with a vengeance with the DJIA and the SPX.

Williams %R is already at the -100 area of oversold on the 14 day indicator, just as it was on Wednesday before rebounding.  It’s rare for it to stay that low for long, but can stay oversold for much longer periods while the markets shake out the excess bulls floating around.  I’d be more optimistic about it, but the 28 day indicator hasn’t gotten there yet.  I’d prefer to see both time periods have a few days in the oversold area before considering this a solid near-term bottom for the markets.  That’s the indicator I’ll be watching though.  As SPX moves out of oversold, for at least two days in a row (preferably three) I’ll turn bullish again.  For now, I’m more neutral for the short term and won’t be shocked to see some sideways trading for a few weeks, possibly with the trend line of higher lows becoming a new trend line for resistance.