November 16, 2012 Leave a comment
Stocks as measured by the S&P 500 finally made their move and broke decisively below support at the 200-day moving average. Overall, stocks have shown little fight in trying to hold key support levels in recent weeks. They only bounced once off of the 50-day moving average before breaking lower, and they battled for only three days at the 200-day before giving up the fight.
Now that stocks have broken several major resistance levels, it is worthwhile to consider where support lies next. The good news for stock investors is that the market is still holding just above a variety of well established support levels. The bad news is if stocks break below current support, the trip lower might be swift through a sizable air pocket.
Stocks currently have technical support on five key readings.
First is a long-term trend line around the 1350 level on the S&P 500. This level was previous resistance for the S&P 500 during its advance in 2011 and has served as support on a few occasions since breaking above this level in 2012.
Converging at this same 1350 level is an upward sloping trend line dating back to the August 2011. Since the sharp correction last summer, the stock market has bounced off of this trend line on four previous instances over the last year. At present, stocks are trading just above this trend line.
Another longer-term trend line is also currently converging at the 1350 level. This is a trend line dating back to the summer of 2010. Stocks have responded to this support on four separate occasions over the last two plus years. And when stocks periodically broke below this trend line in the second half of 2010, they still demonstrated responsiveness to this support in never breaking decisively below it for any sustained period.
Beyond the trend lines, another important indicator supporting stocks is the Relative Strength Index (RSI). It touched a reading below 30 this week, and the last nine instances that the RSI approached or dropped below 30, it marked the bottom of a stock correction at the time.
Lastly, momentum indicators as measured by the MACD have fallen to levels last seen on only a handful of instances in the last three years. Comparable levels of negative momentum were seen at past market bottoms over the last three years, with the only exception being the sharp pullback during August 2011.
As a result, the stock market enjoys well established support across a variety of metrics at current levels near 1350 on the S&P 500. Holding this support will be crucial in the days ahead, for the next stop to the downside could easily be 1300 or below on the S&P 500.
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.