At Important Support

Market Overview

After reaching its projection target of 1946, which was probably (but unconfirmed) the top of the a-b-c corrective rally from 1812, SPX retraced to 1872, rallied to 1927, and toward the end of the week came back down to re-test the 1872 level once more. It appeared to hold once again, since we closed at 1880, but we’ll find out for sure on Monday morning when the market opens. Since the rally from the 1812 low, that level has been tested at least four times and held each time. That makes it an important support level; all the more because the index appears to be making a head & shoulders formation with a horizontal line at 1872 as the neck line. If it breaks, at a minimum we could challenge 1812 once again and eventually go lower if we are truly in a bear market.

This break could come as early as next week if we have some negative news over the week-end. Although, with SPX ending Friday with a 35-point loss, we are very oversold near-term and could get a price bounce first. If so, we will have to wait until the next time that 1872 is challenged to see if it is still capable of holding.

A sign that the weakness may be intensifying was demonstrated by the NDX performance on Friday. It came very close to its January 20 low, which is the equivalent of 1812 in the SPX. In past bear markets, NDX has been a leader on the downside. Until recently, it had performed at least as well if not better than SPX, making its final high in November 2015 while SPX topped in May. If its former relative strength is now turning into relative weakness, it is not a positive prospect for the bulls.

SPX Chart Analysis

Daily chart (This chart, and others below, are courtesy of QCharts.com.)

In the last letter, l suggested that the upward corrective pattern from 1812 was most likely developing as an

a-b-c correction, and this appears to have been correct. That correction ended up forming a wedge pattern which was broken on the downside and re-tested. Prices then dropped again with Friday’s 35-point decline which found support one more time at the 1872 level. When a wedge is broken, prices have a tendency to retrace all the way down to the point of origin which, in this case, would be 1812 on SPX. Friday ended the day oversold on a near-term basis, so it would not be unusual for the index to have a bounce, first. In fact, that would help to complete the H&S pattern which is potentially developing above the 1872 neckline. It would also make sense for the wedge pattern to be a consolidation in a downtrend, and that we are engaged in another period of re-distribution above the 1872 level that will re-confirm the higher counts. This is often what takes place in downtrend consolidations.