SPX Chart – Technicals Weighing Heavy

I charted the past six and a half months for the S&P 500 ($SPX) after the markets closed on Friday, January 22, 2010 when it finished the week at $1,091.76.

A couple of weeks ago in my S&P 500 chart post I said I thought the trend line of higher highs was worth watching after it broke to the higher side one day before I posted.  It ended up being a very telling line to watch.  Although the SPX continued to move above the trend line, it couldn’t stay above it for more than one full day at a time before falling back down below it.  The intraday prices straddled this trend line for nearly two weeks until the lower trend line of higher lows I’ve been talking about for a while converged with it and that’s when the SPX broke.  It held on until the final day possible before the trend line of lower highs broke.  And when it broke there was no looking back.

The 50 day moving average provided support for the SPX on Thursday at 1114 which tricked me into adding a small SSO position.  Then on Friday the support broke and the 50 day moving average became resistance for the day.  That allowed the SPX to look further south where it promptly met up with another trend line of higher lows that hasn’t been visited in almost three months.  Support held here at the end of the day which was still 6 points above the 100 day moving average which is currently at 1,085 and inching higher.  A break below this less steep trend line of higher lows and below the 100 day moving average clears the stage for a move as low as the 200 day moving average which is at 1,007 and moving higher at a slightly steeper ascent.

The SPX is already down roughly 5.5% from its intraday high.  A move to its 200 day moving average would give this move lower around a 12% correction.  I consider that pretty healthy for a market that has only had dips in the 5-7% range for most of the past 10 months.  In other words, we’re due for a better correction to shake out some of the excess.  If the SPX can make it down 10% I’ll have to think it’s a good buying opportunity.  The downside should be limited from there and the path higher would have a much more open area for growth.

On the other hand, if Friday’s low holds support and the SPX starts moving higher we could also have room to move another 6% higher than the current level before hitting tough resistance again.  It would have to get across the 50 day moving average before that could happen, so keep an eye on that indicator as an important hurdle.  The previous trend line of higher lows could become a trend line of higher highs to follow too.  I’d rather see a deeper correction as I outlined above to think any dead cat bounce has real legs though.

Volume was well above average for the past three days when we saw the biggest three day fall in months.  This steep fall sent the Williams %R indicator tumbling deep to extreme oversold levels.  The 28 day indicator hasn’t been this low since last July when it bottomed out.  Watch for a move out of the oversold area and then after two days confirmation I’ll consider it more of a rally worthy bounce to chase.  Until that happens we could see the markets stay oversold for weeks if not longer while the excess buyers fall out slowly.

Monday and Tuesday will be key days to watch.  Monday will quickly tell us if the two closest technical indicators give way.  Tuesday will let us know if a move higher on Monday is anything more than a dead cat bounce.  The fun has returned to the markets, keep watching and be ready to get back in deeper when we start moving higher again, whenever that is.