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S&P 500 Bounces Right Back Into Resistance




Last week when the S&P 500 was down to 1070 I wrote that equities are at an important low, if this is still a bull market. My main point was that the profit taking had pushed the market down to levels at which we would normally see a bounce. But only if we were still enjoying cyclical bull market conditions. If, instead this was the resumption of the bear market, then all bets were off.

Since then, thanks to hindsight, we know that equities did bounce. So we have this evidence that we are continuing merrily within the cyclical bull market that began in March 2009. The market is higher for most sectors, including the ones I specifically outlined: Energy (oil producers and oil services) and Gold. But as you can see from the chart below, the S&P 500 is now back at a level that offers quite a bit of congestion:

S&P500 bounce into resistance Feb 2010

The retreating 50 day moving average (blue line) is just above price, offering further resistance. Don't ignore the change in this moving average. Since March 2009 it has been rising (positive slope) but just recently it started to head down. Although I don't think that necessarily is a mortal blow to the market, it is worthy of attention.

Peeking under the hood, the breadth indicator that we looked at before, the percentage of components above their 50 day moving average, is now sharply higher at 50%. As well, for the longer term breadth gauge, there are now 77% of S&P 500 constituents closing above their 150 moving average - a sharp bounce off the 60% low just as we were concerned that momentum was waning. Those levels aren't high enough to give me worry that we've come up enough for this bounce. But a shorter term breadth indicator is approaching worrying heights.

For almost all major market proxies, the percentage of stocks above their short term 10 day moving average is now close to maximums. If you stepped into the correction and went long to rent some exposure, congratulations. Now I think would be a good time to start looking for the door to make a calm and profitable exit. Take a look at the short term breadth for the S&P 500 (SPX), S&P 100 (OEX) and the Nasdaq 100 (NDX) to see what I mean:

percent SPX above 10 day MA Feb 2010
percent OEX above 10 day MA Feb 2010
percent Nasdaq composite above 10 day MA Feb 2010

Also, the same short term breadth indicator for the Semiconductor sector (SOX) is at lofty levels (98%) which have previously provided indications of a top or a rest for semiconductor stocks. Since this sector has been very important tell for the cyclical bull market, it pays to continue to defer to it.

To be clear, I'm not necessarily saying that the market is going to automatically head back down again from here. But I do think that there is evidence that we're already in thin air territory in the medium term time horizon. So for the longs to ask the market to push ahead in the short term even more is over staying their welcome and just asking for trouble. As the stock market maxim goes: "Bulls make money. Bears make money. Pigs get slaughtered".

(or is that PIIGS?) ;)

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4 Responses to “S&P 500 Bounces Right Back Into Resistance”  

  1. 1 Jim

    Thanks for the breadth charts. I've been following your site long enough to say for sure that you are way more accurate than most market "gurus". I hope you get enough out of this site to keep doing it!

  2. 2 Babak

    Thanks for the kind words Jim. To be fair, I do make my share of mistakes but the sentiment is appreciated :)

  3. 3 Tariq Malik

    I am new to trading. Your article seems so logical. Is it safe to assume that it will be easier to make money shorting poor quality stocks than going long with high quality names like aapl, amzn, gs, csco etc.. I am talking for day trades and swing trades and in one to two month time horizon.

    Thanks,
    Tariq Malik
    Hopkinton, MA

  4. 4 Babak

    Tariq, I don't think of those stocks as "higher quality" just large caps. If you're new to trading my suggestion would be to pick something that moves slower. For example, REITs or a sector fund ETF and slowly get the feel for it. I wouldn't recommend jumping into daytrading high beta stocks.

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