The stock market pulled back a bit last week, and that is fairly common following breakouts of reversal formations. It appears the major indexes are sliding back to test their respective breakout points, before the next leg higher can begin. The major indexes also got a little extended from some short-term moving averages, and during advancing markets, these averages can act like a magnet to prices. Bond yields ran right up to the top of their recent range and pulled back, while crude oil spiked higher to yet another all-time high.
Over the past month, the S&P 500 actually had two distinct breakouts, one out of an inverse head-and-shoulders (H&S) pattern and one out of the base that had been in place since mid-January. So, in other words, it has been a somewhat complicated base. The initial move above the neckline of the H&S pattern was completed with a close above the 1372 level on a closing basis, and 1387 on an intraday basis. It is this breakout range, and the most recent one, that we think is currently being tested. Today, the intraday low for the S&P 500 was at 1384, so we were right in that zone of important support.
In addition to testing the breakout zone, we think the S&P 500, as well as many other indexes, got a bit extended from some shorter- to intermediate-term moving averages, and they have a way of acting like a magnet every so often with prices. What this gravitation back to technical supports does is it keeps the slope of the advance in check. If the slope of an advance becomes too steep, it is simply unsustainable. Some of the key averages that may be tested and potentially provide a floor for this pullback are the 30-day exponential at 1379, and the 50-day and 65-day exponentials that both come in at 1373. Trendline support, off the intraday lows since March 17, sits at 1386. A minor 23.6% retracement of the rally since March, using intraday highs and lows, targets the 1384 zone.
On the upside, the “500” rallied into a layer of very heavy chart resistance that we have been talking about for some time. We might have to take multiple runs into this zone, and then back up and recharge, before we can clear ourselves of this overhead supply. The beginning of this supply (resistance) starts at 1407 from the bottoms in November and August. In addition to this thick area of supply, the index ran smack into a key Fibonacci retracement of 50% of the decline, and this can sometimes keep a lid on prices, at least in the short term. In addition, the 200-day simple average was sitting less than 10 points above the recent intraday highs, and many times, there is automatic selling when prices rally back to this moving average. We will note that prices have been below the 200-day simple average since the end of December, and that the average has been declining since mid-January. This is a bearish sign while it lasts, but it does appear that the 200-day is just starting to flatten out. If prices can get back above the 200-day, and the average starts to rise, it would be a very bullish sign for many technicians as well as many market participants. If and when this occurs could be part of the catalyst that fuels a move through the heavy stock supply.
Taking a look at some of our weekly and monthly charts gives us a mixed view of the stock market from a longer-term perspective. Unless it is crystal clear, we have always had a hard time declaring whether we are in a bull or bear market. We are in one of those unsure time periods right now. In our view, and once again, unless it is obvious, there is not one chart that can make a definite case either way right now. When it is not obvious from price trends, we almost don’t care what type of market we are in, because our main focus has always been the intermediate term, which, in our view, is the easiest to call, and most profitable to take advantage of.
We believe the strongest case to make, which suggests the market has transitioned back to a bullish trend, is the completion of a major reversal pattern. However, because there has not been enough time, prices have not jumped back above some longer term moving averages, and we have not seen some shorter averages cross back above some longer averages, and these crossover systems remain on sell signals. Nevertheless, that was no reason not to play or call for the nice intermediate-term rally that we just experienced.
One simple crossover system that has worked very well over the years, and uses the 17-week and 43-week exponential averages, is still on a sell signal. The 17-week crossed below the 43-week in early January, issuing the first sell signal since late-2000. Prices have jumped back above the 17-week but are back below the 43-week after climbing just above for a week. The 17-week has curled higher, while the 43-week has flattened out, a potential precursor to a bullish crossover. The 43-week relative strength index (RSI) has crossed back above the 50 line, indicating that the market has swung back to the bull side. The 43-week RSI had been below 50 since early January, indicating a bearish trend in momentum.
Moving to a monthly chart, the current price action, long-term moving averages, and long-term momentum, look very similar to the market back in 1990. Prices have dropped below the 10-month and 20-month exponential averages, but those averages have not crossed, so they remain on a long-term buy signal, just like in 1990. The 13-month RSI dropped below 50 in January, but has rebounded back to just above the 50 line. This is very similar to the momentum action in 1990. The 50 line is our demarcation between a rising market and a falling market. The current rally took prices right to the underside of the 10-month and 20-month averages and from a longer-term perspective, will need to recapture these to turn this chart bullish.