I charted the S&P 500 ($SPX.X) after it closed at $877.52 on Friday, May 1st. While this bear market rally has lasted longer than I expected I still think it faces some sizeable obstacles in the near term. The farthest away and possibly most important is the trend line (A) of lower highs going back for the past year. To me, the longer trend lines always have more importance and just because this one hasn’t been visited in seven months doesn’t mean it doesn’t wield some power still. What makes it more menacing is that it’s on a path to converge with the horizontal line (B) that I drew that shows previous areas of support and resistance (lows and highs) from this past fall and part of the winter. If the SPX keeps its current run going those lines could come together to provide a hard wall of resistance for further near term advances.
The next horizontal line (C) I drew below that shows another area of previous support and resistance and has also been acting as resistance for the past couple of weeks. Making this current area even more interesting to watch are the lines moving up and now converging with line C. The trend line of higher highs (D) has been getting closer and closer to the line of higher lows (E). One of those lines will lose its fight as the other one holds. That could happen any time in the next two weeks, with the break coming sooner more likely. Line C helps with resistance and could force another decline below line E.
You can’t really see it on the full year chart, especially with my trend lines in the way, but the 10 and 20 day simple moving averages (sma) are holding support. The 10 day sma actually broke a few times, but after closing just under it on April 23rd, it has shown more strength and hasn’t closed below it since. The SPX hasn’t closed below its 20 day sma since March 11th. It held strong support this week after it marked the intraday low on April 23rd. These lines add to the SPX bullish case. Even the 100 day sma (not shown) is now below the SPX and could offer support around 830. Williams %R remains in overbought where it can stay for much longer.
All of this goes without even mentioning that the SPX has been up for seven of the last eight weeks. Even if this is truly the beginning of a bull market, it will have another couple of weeks back to back of losses, one day. I suggest watching carefully to see which side, support or resistance, holds it’s position longer. I’m keeping some cash on the side until I see a good break to the lower side and can get back in at that point. If SPX gets closer to 830, and definitely if down to 800, I’ll be ready to get back in. Of course, I’d like to see the Williams %R support a buying decision again too. For now, keep watching Williams %R and if it breaks below overbought for two or three days in a row on both the 14 and 28 day periods, expect much further declines.
