S&P 500 Chart – February 5, 2010

I charted the S&P 500 (SPX) after the markets closed on Friday, February 5, 2010 with the SPX at 1,066.19.

A couple of weeks ago when I charted the S&P 500 I claimed the technicals were weighing heavy.  My call proved accurate including my warning that the following Monday could be no more than a dead cat bounce.  Since then we’ve seen the SPX trade down and sideways and down again.  Two weeks ago in reference to Williams %R I said “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.“  You can see in the chart below that Williams %R did come out of oversold, but faltered before the second confirmation day.  Watching that indicator could have kept you from over-committing too soon. 

Thursday and Friday of this past week gave a good view into how fast the markets can still fall.  It almost seemed that once there were no more road blocks on the path towards the 10% correction I’ve been calling for it was almost a race to get there.  That mindset stopped working at 2:00 pm on Friday afternoon when the dollar faltered and started to decline.  That brought about a massive short covering rally that lasted the final two hours of the day.  It showed how important a weak dollar is for many bulls to stay aboard.  Keep an eye the dollar and you’ll know which way the markets will turn on most days.

Now that the SPX has moved itself into no man’s land between its 100 and 200 day moving averages the swings each day could stay wide.  I couldn’t find a good trend line I liked that offered support or resistance nearby.  I’d still like to see a full 10% correction from the intraday highs last month.  That means the SPX needs to hit 1,035.  The 200 day moving average is around 1,019 right now and is inching higher each day.  That’s the second level of potential support.  I still believe the downside risk below the 200 day moving average is limited and this move closer to it is just healthy. 

If the dollar starts falling again the SPX could rally in return.  Upside resistance will probably still continue at the 100 day moving average which is drawn in blue in the chart below and somewhat hidden by the trend lines I drew.  Those trend lines could all act as resistance too.  The previous trend line of higher lows is riding almost dead on the 100 day moving average which gives it extra likelihood of thwarting the SPX in an all out break out.  The other two sharply descending lines are too short to be able to tell if they’ll stick around long enough to come back into play.  The steepest is the trend line of lower highs.  The longer one, not quite as steep, was support and then became resistance.  Either way, 1100 is going to be hard for the SPX to cross in the near term and if it does we’ve probably already seen the Williams %R indicator tell us we should be invested more heavily again by that time.

I’ll keep repeating my warnings about the Monday traps that I’ve mentioned for the past couple of weeks until the prediction stops coming true. Monday and maybe Tuesday might offer positive days for the markets, but don’t get fooled by the price action. Let this correction finish before believing the first two days of a head fake rally.