February 8, 2010

S&P 500 Time Study

(Click to enlarge the graphic).

As markets fell harder into last week's close, a bounce conjured thoughts of buying into the dip - but is the market poised to drift lower?

The three bar charts above represent a multi-time period study of the S&P 500 (left to right, 4 hour, daily and weekly). Each chart plots 50 and 200 period moving averages (red and blue respectively), and a 14 period RSI with red and blue, solid and dashed lines indicating resistance and support levels. Fibonacci retracement grids are plotted from various pivot points, with red vertical dashed lines indicating dates of interest. Price levels of interest are denoted using red horizontal dashed lines in the price area as well.

Beginning first with the weekly chart (far right), we see that significant resistance was to be expected near 1135, derived from the 61.8% retracement level of the May 08 - Mar 09 swing. Notice that during the initial bounce off of the Mar 09 low, the market paused near 956 before later accelerating higher above the 50 period moving average for the first time since Dec 07. This level was coincident with the 38.2% retracement of the same aforementioned swing, but that level has yet to be revisited. We'll return to this point later in the piece, but note that the most recent high formed an RSI Negative Reversal when compared to the May 08 high. The lower high in prices, accompanied by higher swing highs in RSI, occurred at a bearish extreme resistance level in the RSI itself. This is an extremely bearish signal, and should give longs pause. Drawn using red trend lines, the market's inability to match sentiment has the net effect of pushing the market lower.

Looking next to the daily chart (center), we first see the market has fallen below its 50 period moving average - the first sustained break of that level since Jul 09. The most recent high near 1050 came on the back of RSI Bearish Divergence, whereby prices made new highs, but sentiment was in fact waning. That this occurred again near the extreme RSI bullish resistance level is significant, and was accompanied by the 1050 level being repeatedly hit for nearly a week. The first short target was hit last Friday near 1044, which coincided the 38.2% retracement of the swing from Jul 09 - Jan 10. While the bounce was not unexpected, lower prices are possible as reflected by the Fibonacci grid. Currently, RSI is struggling to maintain its bullish extreme support level. With the market below the 50 period moving average, downside exposure is likely.

On to the 4 hour chart (far left), fine tuning becomes possible. The Fibonacci grid drawn between Nov 09 - Jan 10 reveals not only price targets, but pivot points as well. The initial fall did not hold at 1104 near the 38.2% retracement level of the aforementioned swing, but prices did return to find significant resistance last week. A bounce off 1075 near the 61.8% retracement level of the swing was in fact unsustainable, and turned this time period decidedly bearish. Indeed, prices subsequently have fallen below both the 50 and 200 period moving averages. Among the few positives that can be drawn from this chart is the action in the RSI where the intermediate bearish market support appears to provide some solace as to oversold levels.

Drawing these three charts together, technicians may reach conclusions as to the near term S&P 500 price action. The weekly chart is clearly a cause for concern, yet there is hope near 956. This level represents former resistance that has yet to be revisited since the recovery from Mar 09 lows. That level also presents a key tenet in bullish markets wherein the ability to hold a 38.2% retracement is seen as a positive sign. 956 coincides with that retracement value between the 1135 weekly high and Mar 09 lows. To get there, the market will have to break below 1044 on the daily chart, exposing 979 (the 61.8% retracement on the daily chart itself). An inability to hold 1044 will dissolve the mid term bullish sentiment in the S&P 500 in that the 38.2% retracement level on the daily chart would be defeated.

Given this structure, the following is anticipated beginning with the 4 hour chart. On the long side, 1075 should serve as resistance. Further downside to 1003 (near the 121.7% retracement on this same chart) would correspond with the 200 period moving average on the daily chart of approximately 1018. That fall should dip below support at 1018 (which, as a moving average, will be a dynamic level), and would then serve as resistance. That same "outside return" - where support turns resistance - may be found around the 1004 level (see 4 hour chart) and 979 (see daily chart). Shorts should use these same levels to update trailing stops, and in turn collapsing those levels should the market approach 956. Long or short, 956 is perhaps the most important price on these charts. This level has the potential to form an RSI Positive Reversal on the weekly chart, the formation of which is projected using blue trend lines.

As remarked last week, leverage neutral is advised to the long side, and the case for leverage short is building. Traders who continue to hold this market long need to find support near 1055. Should RSI hold its extreme bullish support on the daily chart, it is tenable we could continue up. There is a faint RSI Positive Reversal on the weekly chart (not plotted) between the two most recent swing lows in sentiment - the troughs of which correspond to higher swing lows in price. Acknowledge, however, that longs are sure to see even greater resistance at 1090 (4 hour chart, 200 period moving average) and 1111 (daily chart, 50 period moving average). In the bigger picture, longs ultimately stand to find resistance near 1231 (weekly chart, 200 period moving average). Each of these values suggests there is less room to the upside than down, so risk control regarding current or pending trades takes on increased significance. Expect market volatility to ensue as everyone will be on edge.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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