SPX: Caution, Pullback Ahead!


SPX: Caution, Pullback Ahead!

S&P 500 SP:SPX


One of the attributes of technical analysis is that it offers consistent tools to define and manage risk. The current SPX daily chart offers good illustration.

  • The current rally is maturing at a significant resistance level created by prior support and resistance levels (February, March, and June). I think of this as a polarity zone.
  • This is the polarity law: Previous support becomes resistance and previous resistance becomes support. Note that this zone was unsuccessfully tested in early June. The failure of that prior test is a warning sign.
  • Oscillators ( RSI and PPO ) are showing signs of fatigue.
  • PPO is percentage price oscillator . By presenting moving average levels as a percentage rather than a difference, it makes it easier to compare levels over time.
  • The low level of the average true range (ATR) suggests complacency.
  • There was an intraday bearish reversal (August 8th) to provide extra warning.
  • Two well-defined levels for a pullback would be the 20d exponential moving average and the 50d moving average.

If those levels are reached, one would need to analyze market behavers and reevaluate their strategy.

By moving to the time frame of higher perspective (in this case the weekly) we see the market is also having to deal with yet another important ceiling.

In this case the almighty 30 weeks moving average (Stan Weinstein stages analysis) is acting as an important intermediate timeframe ceiling that also calls for a more cautious view. This is occurring with the weekly RSI moving into the 50 area (suggesting that the oversold has been adequately relieved).

Being fractal (using multiple time frames) is important in technical analysis . After using the microscope ( daily chart ) we use the macroscope (weekly chart) to see if we can obtain extra nuggets of wisdom from the big picture.

Net-net, the weight-of-the-evidence suggests that investors should be reducing their risk as the market is currently in a downtrend and has reached important resistance levels.

Eric Conrads, CMT, CAIA, CEFA
Chartered Market Technician
Zenith Capital

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