A break of support at 2580-2600 would likely augur for a retest of the February lows at 2530. A failure there, and the real bear market should unfold -- but perhaps not until early next year (December is normally a bullish month, even in bear markets).
Conversely, if $SPX were to climb above 2820, it would be a very bullish sign.
This week saw the ninth biggest one-day point gain in the $SPX in history, as it rose 58.44 points on Wednesday. With that, $SPX had rallied over 200 points in a straight up manner, since the lows just six trading days prior (a time period which included our October Seasonal rally). That is the power of an oversold rally. It may surprise you to know that all of 10 largest point moves in history (by $SPX) have been completely reversed within a matter of days or a few weeks.
On Wednesday, $SPX made a huge move to the upside, rising 58.44 points in a massive display of buy programs that lasted right into the closing bell. Is this the way the market behaves when it’s ready to launch higher, or it is a sign of merely oversold buying which leads to lower prices shortly thereafter? That was the 9 th largest point move in history. Of the other nine in the “top ten” of such moves, every single one retraced that gain – gave it all back – in a fairly short period of time. I was a bit amazed to see that, but if you think about it, the only time the market can rise like that is in response to a very oversold condition – which means the market was already in a downtrend to begin with. So, these large moves have proven to be only temporarily bullish.
Some very wide (and wild) swings have taken place in the market in the last week. Has this changed anything as far as the intermediate-term trend goes? Probably not, but it does show the power of an oversold rally.
One area that is now important as resistance is 2820 -- the top of the first rally a couple of weeks ago. If $SPX were to climb above there and move higher, that would be a much more bullish sign and could change the outlook considerably.
Conventional wisdom holds that October is a bear killer. That is, the market starts to head south in September, accelerates in early October, and then bottoms some time in October. From there it rallies. So the decline – while sometimes very steep in early October – is terminated in October. Hence the term “bear killer.”
Heavy selling continues to engulf the market on most days. The next support level appears to be roughly in the 2580-2600 area, which is the closing lows of February and April earlier this year.
There is resistance at 2820, which is where last week's oversold rally stalled out -- far short of even the most basic target: the declining 20-day moving average. Another resistance point now looms as well: the 200-day Moving Average.
After two horrendous days on October 10th and 11th, the market experienced a solid oversold bounce. Some buy signals were even generated from that bounce, but now it seems to be failing again without having fulfilled even the most basic target of an oversold rally -- the declining 20-day moving average of $SPX. That may still happen, of course, but for now there is resistance at 2820 (the highs of this week). Support is at 2710.
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.