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S&P 500 Index Fighting Resistance

sp-with-fib

This chart tells us a lot. You can see that I’ve drawn in several lines which my seem confusing at first, but I’ll explain what we see.

You can see the purple 200 day moving average line sloping from upper left to lower-mid right. Breaking through that line was a major technical milestone. The longer we stay above it, the more likely it is that this rally can continue on to a new target level. However, the horizontal blue line that continues across the chart represents resistance. This line is a 38.2 % retracement from the March 9th lows – the 38.2% level is a key technological level based upon Fibonacci numbers. It is also coincident with the 2009 high in the market.

The past few trading sessions (represented by the vertical red and white bars on the chart) show that we broke through the 200 day moving average, moved up to resistance at the 38.2 retracement level, then re-tested the 200 day moving average. We moved higher but have not yet been able to break through resistance. This is all very normal/typical market action, and for me it is easier to see that market participants are doing if I look at the chart.

You will remember from previous posts, particularly the ones around March 9th when I wrote that we likely had seen the market bottom for the intermediate term, that I said I anticipated the market to move up to the 200 day moving average (I assumed it would be around 975, but that was a bit high – 925 was the actual level when we broke through). Now that have accomplished that initial phase of the rally, its time to reassess. In our situation, we are in a trading range between 920 and 950. For us to see a continuation of this rally, we need to break through the 950 level, close above it, and have a successful retest. If that happens, the next target is 1050 (the horizontal green line) which is the intraday and monthly high from last October’s crash.

If we fail through and close below the 920 level, we will likely pull back to around the 870 level (the February high). Ultimately, however, my gut feeling based upon the action in the markets is that we will likely see the 1050 level on the S&P in the next eight weeks or so. OK, maybe its more than a gut feeling – every sell-off is being bought by investment managers that are under-invested and who have missed the major rally we’ve had off the March 9th lows.

More later…

Mark