For the second time this year, the stock market has suffered a severe decline in an unusually short period of time. Declines like this used to take weeks, and now they occur in a couple of days. Nearly every indicator is now in some sort of oversold state, but "oversold does not mean buy." One must wait for confirmed buy signals, and even then the early ones are often stopped out in a market like this.
For the first time since late June, $SPX had a serious down day in hand, but the bears let some of it slip away as prices rallied strongly in the last two hours of the day. Even so, there are some very interesting technical indicators in play at this time.
This market is becoming truly divergent as the number of negative indicators and their strength is increasing, but $SPX prices (and those of other indices) have not broken down, nor has volatility ($VIX) increased. The latter ($SPX and $VIX) are more important than the former -- at least for now.
$SPX pulled back to its still-rising 20-day moving average, which was at about 2870 and that was been about the extent of the correction. As a result, the chart of $SPX remains bullish, as the Index is still in an upward-sloping channel and no important support levels have been broken.
The negative seasonality of September seems to be weighing on the stock market. This has caused $SPX to pull back towards support at 2860-2870. So far, that support has held.
A close below 2860 would be of more concern, but even then there is further support at 2840 and then major support at 2800.
The breadth oscillators are now on sell signals. And now $VIX is probing the 15 level. a close above 15 would be bearish for stocks.
On the first four days of this week, $SPX closed at a new all-time high each day. It was accompanied by strength in the other indicators to confirm the breakout. However, some overbought conditions are beginning to appear.
Last week, we wrote extensively about the similarities between the current market and the market of the summer of 2000. In 2000, $SPX rallied back to its old highs, forming a double top right around Labor Day. From there, the market declined 50% into the summer of 2002.
It was just over a week ago that $SPX was having some trouble and was testing the 2800 level (August 15th). That test was successful, and the Index has been pressing the upside ever since. It has run into some resistance at the old highs, but it is trying to overcome that. The support level at 2800 remains an extremely important. The $SPX chart remains in an upward channel, as shown by the blue lines in Figure 1.
Perhaps the market is merely recharging its batteries for another push higher, but action had generally been lackluster until yesterday's large rally. Once $SPX failed three times last week to break out to new highs, it succumbed to selling. That selling culminated with yet another test of the 2800 support level. The market passed that test with flying colors, as a large rally rebounded from there. The take-away from this action is that the $SPX chart is still bullish as long as support holds at 2800.