This S&P 500 ($SPX) chart shows the past six months of daily prices after the index finished the week at 1,354.68 on Friday, July 6, 2012.
Resistance at the trend line of lower highs proved too much for the large cap index this past week as the rally in stocks was halted after surging higher from the lows two weeks earlier. The move lower kept the SPX within its descending trading channel with more room to the downside than the upside. However, the same trading channel might not last too much longer. The 10, 20 and 50 day moving averages (dma) are lined up in a bullish formation. The 10 dma is above the 20 dma and the 20 dma is crossing above the 50 dma. These patterns indicate momentum that favors the bulls.
The descending trend line in the middle shows a line that has wavered between support and resistance multiple times over the past four months. This line could act as support again now that it has converged with the 20 and 50 dma. Just below this mark, and ascending quickly, the shortest trend line that marks the line of higher lows could offer support for another quick bounce higher. If this ascending trend line does not hold support, the S&P 500 could move closer to its trend line of lower lows, 3% below Friday’s closing level. This is where another trend line of higher lows (excluding the early June bottom) has a strong opportunity to stop further declines.
The Williams %R indicator moved lower for the 14 day period, but the 28 day period has not broken below the overbought range and therefore has not issued a sell signal yet. The fact that the 56 day period did not make it into the overbought area should limit the length of the move lower. Indexes rarely have larger than 5% sell offs without having more substantial overbuying seen in the 56 day period. This makes the current chart appear to have limited downside, assuming 1,315 holds support. The upside potential is limited until the SPX moves above 1,375.
