The S&P 500 is at a critical juncture as investors and traders will be determining if this is the start of another bear market, a prolonged holding period, or a correction which soon abates. We look to the fundamentals to drive our discussions because we think they drive markets in the long run. To be clear, the fundamentals can be monetary and fiscal policy, earnings, or the economy. That being said, there’s nothing wrong with adding some technical analysis to help decide where prices are headed. In fact, the technicals are what tell us the S&P 500 is at a critical level. Yes, we’re aware that technicians always have critical levels, but you can trust that these are critical since we rarely talk technicals.

The chart below shows the S&P 500 has been making lower highs since February. That allows technicians to draw a descending trend line. That’s the resistance the market faces. The 200 day moving average has acted as support for the market since the February correction low. It’s interesting to see how the volatility has changed relative to the market. The rising VIX combined with the rising market in January gave us a warning sign that the market might fall. Now we have a declining VIX along with a market that’s stuck at the low end of its range. If the pattern were to continue, stocks would soon rally. There should be a sharp move in the near term as the resistance and the support are converging, implying that either to the upside or the downside there will be increased volatility.

Source: The chart below

Earnings Growth Has Been Great

Heading into this earnings season, investors were hoping great results could end this S&P 500 correction. Part of the reason why we looked to the technicals is because great earnings reports haven’t moved the needle. There’s no question the great performance in 2017 was pricing in great 2018 earnings which were expected to be boosted by tax cuts. However, one has to wonder what results will move the market higher if these can’t. The heightened expectations were beat which is a positive.