The Technical Outlook For The S&P 500

$SPY

The best gauge is perhaps the S&P 500, below see the daily and the weekly that I refer to in this discussion.

As can be seen from the weekly, the multi-year rally looks to have peaked this year around an exhaustion area of 2135/40, that aligns with the 161.8% Fibo extension level of the entire 2007-2009 Bear trend.

After climbing to this place/zone, the index has gone on to break outside of a strong long-term Bullish channel, before falling sharply in the middle of last month, followed by a period of stabilization that has lasted for about a 20 odd days.

But, when long-term Bullish trends end, it is very common for the markets to stage strong counter-trend rallies that last several days to weeks, before a fresh wave of selling comes on.

This is because most participants still look for trades that had worked well in the past, in this case “buying the dips.”

But, savvy traders will use these counter-trend moves to reduce their net Length exposures and some would increase Short bets. As a result, this typically precedes another sharp leg lower before it becomes clear to most participants that the trend has changed.

At this stage it is still too early to say whether the markets have marked highs, my work shows that the technicals indicate this may well be the case. And now that there has been a decent recovery, the probabilities of another leg South have increased.

Last week the S&P 500 broke through Key resistance at 1995. But the Bulls were unable to hold their ground because the rally ran out of steam at the 61.8% Fibo retracement mark of the move South from the record high, at 2021 (see the daily).

The resulting sell-off created an Inverted Hammer candlestick on the weekly, a technical pattern that signals weakness, particularly if the low of this signal candle is breached decisively.

The low on the S&P 500 last week was around 1946, a mark which roughly corresponds with the 38.2% Fibo retracement of the recent upswing. If this breaks down, the sellers may then target the 61.8% Fibo retracement mark of this move at 1905, then come the 78.6% Fibo retracement mark a 1874, followed by the August low at just below 1835 and then the October low at 1820. These are the Bearish targets in case we do see a move the Southside this week.

On the Northside

The Key resistance marks for the S&P 500 are at 1980, then 1995 and the 61.8% Fibo retracement at 2021. If the latter breaks then the index may go on to test the next resistance at 2045 or the 78.6% Fibo mark at 2072, before deciding on its next move.

Stay tuned…

HeffX-LTN

Paul Ebeling