The Next Critical Level For The S&P: Stay Above 2,028 Or Channel Support Is Broken

Yesterday we presented the latest note from UBS’ technical analysts, Michael Riesner and Marc Muller, who said now that the S&P had hit their near-term top target of 2,050, it was time to “sell” the “most overbought market since 2009.” We suggested that, based on their recent accurate track record, that it would be prudent to follow their advice instead of Gartmaning it. So far they have been correct.

So what are the key technicals levels from this point on, and what do the charts say now? For the answer we turn to BofA technical analyst Stephen Suttmeier who has just released a note in which he warns that “daily price & breadth momentum waning. Watch S&P 500 channel support at 2028 – a close below would be a bearish sign.” He also adds that “similar to early November, daily MACD at 1998-2000 overbought as breadth momentum shows a bearish divergence.”

In other words, the technicals are going from bad to worse, that another round of unexpected flip-flop jawboning from a Fed president may be needed to prop up the S&P 500 as it prepares to turnaround once again, putting all the central banks back in the corner once again.

Here are the details:

Late-Mar vs. early-Nov déjà vu charts

Daily momentum waning, watch SPX 2028 channel support

The S&P 500 is stalling below 2085 as daily momentum for price action and especially market breadth is waning. Similar to early November, confirmation of a near-term S&P 500 peak could come on a close below rising channel support near 2028 with daily Williams %R moving out of overbought. This would place the focus on the 200 and 100- day MAs near 2017 and 1997, respectively, which are ahead of chart support at 1969- 1947. Should the channel hold, resistances come in at 2056.60 (Tuesday’s high), 2085 (double bottom count), and 2100 (channel resistance). Note that we would continue to view a failure below 2085 as a confirmation of a bear market rally.

Daily MACD back at 1998-2000 overbought levels

Violent swings in the S&P 500 have pushed daily MACD to oversold extremes similar to 2011 as well as to overbought extremes similar to 1998-2000. Daily MACD is back at these overbought extremes. It took two months for daily MACD to go from oversold to overbought moving into both early November and late March. Momentum shifted from the “is the world falling apart” bearish side of the boat to the “can we break out to new highs” bullish side, but the boat has not yet tipped in either direction as the S&P 500 remains range-bound between the 1800 and 2100 areas.

Momentum for market breadth is breaking down

The McClellan Oscillator is market breadth momentum indicator. Similar to early November, the NYSE McClellan Oscillator has lower highs vs. higher highs on the S&P 500 and shows a negative divergence. This coincided with the November peak and was confirmed by the loss of the late August uptrend line in the McClellan Oscillator. The pattern now is eerily similar to early November as the McClellan Oscillator shows a bearish divergence and has broken below its uptrend from January.

Breadth: % of SPX stocks above 10dmas breaks down

Another sign of a loss of momentum for market breadth is that fewer S&P 500 stocks are above 10-day moving averages (dmas) now vs. one month ago. This is similar to early November when lower highs for the % of stocks above 10dmas coincided with higher highs on the S&P 500 and set up a bearish non-confirmation or divergence (just like the one on the NYSE McClellan Oscillator (Chart 3)). The breakdown below the late- February and mid-March lows on the % of stocks above 10dmas may have similar bearish implications as the early-November breakdown below the late-October low.