Stock Martket (S&P 500) Outlook…What Happened?

Tough week for the equities markets with the S&P 500 index losing about 4%.  Between Wednesday and Thursday we had an interesting dynamic play out which tied in with the break below 1130 – which I mentioned last week needed to be watched because a break below that would target 1110.  The market surpassed the target with a weekly range twice that of the average week.

Wednesday we saw the 1130 area tested, but it recovered and finished up near 1138.  Thursday the market started to fall.  And then took out the lows of Wednesday.  The penetration of that low was our warning signal.  Why?  This is what I call a truncated price swing….it may sound fangled, but really it is reversal on any time frame where we have a price confirmation that the current trend is in jeopardy or has been broken.   When we view a chart (15 min, hourly etc) of the market so far this year we see prices making higher (or similar) highs, and not penetrating significant support on the downside – the main support being 1130.  So when the market rallies and can not get to a former high, we have our first indication something is wrong.  When a key “low” is taken out, our trend has changed. It was the first time a former significant high was not matched and a significant low was taken out.

The definition of an uptrend, simply put is “higher highs, higher lows”.  When these criteria are no longer there or the criteria reverse, the trend is jeopardized.  In this case the sell-off was swift and hard.  It came on increasing volume and sold right into the close on Friday, none of which are good signs for bulls.

Starting around January 11 we start see to volatility increase and then sky rocket on Wednesday-Friday this week.  A volatility increase is often associated with moves to the downside.  Downside corrections since the 11th were matched with aggressive buying creating an 18 point range in the S&P, but this week the former high was not reached, significant support was taken out and volatility and volume increased…. a perfect short-term storm set-up.

Going into next week the 1084 will need to hold (if you want this market to stay up).  If it does not it indicates another wave of selling with targets of the downside of 1072, 1068, 1061, 1053 and 1046. A key swing low is beyond this with a support area of 1034-1030.

On the upside resistance comes in at 1105, 1110 and 1114-1116, 1020 and 1123.  Movement above 1123 indicates movement up into 1126-1128.  Breakouts will often move back to test the breakout point (but not all the time!), which in this case is 1130.  This is still a key level even though the level was broken.  A rally through that level in the future indicates the possibility of a further rally.  Failure to reach 1130 or the market being rejected (lower) at that level indicates selling once again and likely retest of lows set on Friday.

For a fundamental outlook at some of the world economies you can read Friday’s post…The Next Asian (And US?) Crisis?

There are some key lessons in this analysis which I hope you find helpful in your trading and investing.  If you want to further your knowledge and to create an edge in your trading you can get:

~~Get 10 Professional Trading Lessons…. Free! :
http://www.ino.com/info/447/CD3784/&dp=0&l=0&campaignid=6 ~~

Cory Mitchell, CMT

~Know your risks when trading. Please read the Legal Disclaimer page.

S&P 500 - Hourly