Doom and gloom dominated the airwaves over the last two trading sessions. With the major indices down for the first week in a month last week and a nearly 3% selloff on Monday, the fickle media is hailing the re-emergence of the bear market. That is not to say we should not expect a correction. The market rally is very tenuous, at best. However, a trend-trader is supposed to trade with the predominant trend. For our time frame here, we look at weekly and daily charts and a relative short time horizon. That being said, the S&P 500 still remains in an up trend. Like I said on Saturday, though, one should exercise caution – extreme caution. While the price trend may be bullish, the indicators are telling us a correction is underway.
S&P 500 Daily
If we look at the technicolor chart for the S&P 500, I have highlighted three key areas over the last month. First is the breakout from consolidation. Beginning in May, and continuing through the first week of July, the S&P 500 formed a head-and-shoulders pattern. When it failed to follow through on the pattern in early July, the S&P 500 broke through resistance. This breakout initiated a four week rally as indicated by the yellow area. You can see that the stochastics confirmed the rally and remained strongly in overbought territory.
On August 11th, the stochastics and MACD signalled an end to the trend and pending correction. On Monday, the price broke through its 20-day SMA confirming our fears of a correction.
The long-term trend (6-month or so) is still bullish. However, it looks like we will retrace from here. The first support area, I see, is around the 950-960 area at the 6-month trend line. Based on the Fibonacci’s a pullback of 38% would test support near 883. This is a significant area of support. The 878-883 area is where the S&P 500 failed to complete the head-and-shoulders pattern. The S&P 500 tested this area in May and July. A pullback to this level is possible. A break below this level would be significant.
So what am I saying? I am still looking at a bullish trend, but a correction appears to be underway. However, it is too early for me, as a trend trader, to jump on the bearish trend bandwagon. If the market continues to pullback, I am looking for support at 950-960 and if that is broken then 878-883 is our more significant support level.
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I am an amateur trader and investor with over 15 years experience in the stock market. I was bred to be a fundamentalist and followed fundamental analysis until 2009. Following the 2007-2008 bear market, I began to shift from a buy-and-hold strategy to trend-following techniques.