Welcome to the razor’s edge! It has now been weeks since I posed the question of whether or not the stock market is exhibiting topping behavior in my last post. At that time, I mentioned that we should soon know whether we are experiencing a dead cat bounce within a new down trend, or if the rip-roaring rally that started after the holiday break was the beginning of a journey to new highs for the market. We appear to have arrived at the point of knowledge.
Although I believe that the fundamental economic conditions on a global scale are pointing to slower growth, which should eventually show up in a more pervasive fashion in financial markets, my present curiosity is with the technical conditions that appear to be dictating the value of major indices like the S&P 500 in the near-term.
We have now surpassed the Golden Ratio that I mentioned in my last post. This Fibonacci retracement ratio is recognized by some technical analysts as a point that might confirm that a large directional change in prices which deviates from a previous trend has been negated from a technical perspective. In this case, it might mean that the selloff which began at the end of September might have been an isolated event.
Amazingly, but perhaps not coincidentally, we are also lingering around two other signification points of technical resistance. Those being the 200 Day Moving Average (200 DMA) and the 50 Week Moving Average in the S&P 500.
The S&P 500 has not revisited its 200 DMA since the Death Cross that formed in its moving averages, which I wrote about back in November (although the cross actually occurred in early December). Given the incredible support that the 200 DMA provided back in the Winter and Spring volatility of 2018, I am very interested to see what type of resistance, if any, this major moving average has become.
What might be more significant is the S&P 500 lingering around its 50 Week Moving Average (50 WMA). Although the S&P 500 – as of the time of my writing this post – is currently above its 50 WMA, it is just barely so, and crossed over only hours ago. The significance here is that this is the first test of the 50 WMA since retreating to its 200 Week Moving Average (200 WMA) in December.
From the chart below, we can see that this same test failed miserably back in 2008, resulted in a near retest of the 200 WMA in 2011, and preceded a breakout run back in 2016. It is not difficult to determine that this has the potential to be a significant point of technical resistance and/or support for the S&P 500 moving forward.
I cannot help but feel that if the market is able to overcome these very near-term hurdles, then we may be headed back to test out the previous highs; if for no other reason than that there just isn’t much other overhead resistance for the traders and algorithms to pause at between here and there. However, unless the Fed explicitly states that it will cease or greatly diminish its balance sheet normalization efforts, or actually lowers rates moving forward, I still believe that we will see lower lows than those that were reached in December in the not too distant future. On the other hand, if the market cannot muster the strength to break through these points of resistance, things might get uncomfortable in short order.