In focus: No follow-through

By Lawrence G. McMillan

This market has seen a large increase in volatility in the last month or so, but this volatility has been accompanied by another characteristic: there is no follow-through to these volatile moves.

After the breakdown through 1,390 over a week ago, and the swift move downward from there, the market has swung back upward, then down (last Friday), then up rather violently yesterday, and then down again today. Whew! All of this is coming while our technical indicators are mostly negative, but there hasn’t been a lot of downward progress. Many of these moves occur without seemingly much logic behind them.

The $SPX chart still shows heavy resistance at 1,390. That level was reached last Thursday and then again this week. So far it has held. SPX It is almost touching its 20-day moving average, which is now declining. These resistance areas are not defined precisely, so one would have to allow for a slight overshoot (to 1,400, say) and still say that SPX was encountering resistance. On the downside, the major support is at 1,340. For the first time, that level is below the major bull market trend line that defines this bull market over the last six months or so (see chart). Therefore, if that 1,340 level is tested (and I still suspect it will be), it is extremely important for that will mean that the trend line is being broken as well. It might well be the case that 1,340 would hold and thus there would be a new bull market trend line at a lesser slope, but if 1,340 were to give way, a much more bearish scenario would unfold...

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