Stocks just can't seem to get out of their own way. Both bulls and bears have failed to capitalize on what seemingly should have been opportunities. The bottom line is that the $SPX chart is stuck in a sideways trading range until proven otherwise, with resistance at 2750 and support at 2640.
The Standard & Poors 500 Index ($SPX) is now trapped in a very narrow range, between 2700 and 2740. A breakout above 2750 would be very positive, while a break DOWN below 2630 would be very negative. For most of the rest of the indicators, everything is bullish. But as subscribers know, $SPX is the most important indicator.
For example, the put-call ratios are solidly on buy signals as they continue to fall almost daily.
The market continues to act much better than it did in February through April. That positive intraday reversal on Thursday, May 3rd, still stands as the day that things changed. $SPX has been up most days since then, with only one large down day -- May 15th.
Having said that, the one indicator that is still not in synch on the bullish side is the $SPX chart itself. There is a problem in the 2750 area. Until $SPX closes above there, the chart will continue to have a bearish tint to it.
A week ago Thursday (May 3rd), the market was on its heels as a large day-long sell program had pushed $SPX below the 200- day Moving Average. A close below that MA would have signaled some dire things for the bulls, but then a reversal rally took hold and it hasn't let go yet. As of yesterday's close, $SPX had rallied 130 points from those intraday lows.
A week ago it seemed that $SPX had broken out of the "box" that had contained prices for nearly a month (red box in Figure 1) and was set to challenge some resistance levels. That came to an abrupt halt, and $SPX sold off more than 100 points in five trading days. But then, for the nth time, $SPX bounced off the 200-day moving average. A strong rally has ensued.
In some ways, the market has recently shown a good deal of strength. But in other ways, it has to do more to overcome the intermediate-term bearish trend that still exists.
This week, $SPX finally broke upward out of the "box" that had been containing prices since March 26th (marked in red in Figure 1). However, the real test will come at 2750. If the rally can't break out above there, the $SPX chart will still be in a bearish downtrend.
It may not seem like it, but $SPX has been in a wild trading range between 2585 and 2660 since March 23rd. Moreover, the range is constrained between two moving averages: the rising 200-day MA from below, and the declining 20-day MA from above. Hence, a breakout from this range should produce a strong initial move. The range is noted by a red box in Figure 1.
Last week we published an article showing the different reactions of $VIX to the initial 6% drop in the stock market in early February, as compared to the 6% drop in the stock market in March. In February, $VIX exploded from essentially 15 to 50. In March, a similarly-sized move in the stock market only produced a rise in $VIX from about 15 to 25. That’s a big difference. For reference, those reactions are shown in Figures 5 and 6 – reprinted from the last issue.
From a simple point of view, this market has once again bounced off of the still-rising 200-day moving average several times. If it were to close below there,then that would be very bearish, for a new leg of the downtrend would be in place. Until then, though, there is the possibility that the support in the 2580 area will hold, and further progress can be made on the upside.
As far as the $SPX chart goes, the 200-day moving average (MA) has proven to be the rock that is holding the market together. It stalled the first decline back in early February, and now $SPX bounced off it four times in the last week, refusing to fall below each time. This creates a support area in the 2585-2590 range. But if that is broken, things could get ugly quickly.
