An update on the S&P

By David Morrison  |  12/11/2018 15:38

Here’s an update from Friday’s note on the S&P 500. The index is trading either side of some important levels and a significant break could set the tone for the rest of the year

The major US stock indices went from oversold to overbought in the space of a fortnight. In Friday’s market update I wrote that it was important to keep a very close eye on how the S&P500 ended the week. In my opinion, from a technical perspective, the key levels to watch were three significant moving averages, which for me are the 50, 100 and 200-day exponential moving averages (EMA). The 200-day is particularly important now given how the October sell-off saw the S&P break and hold below this average for the best part of a month. This didn’t happen during the correction at the beginning of this year, nor during the subsequent wobble in April/May. In fact, we must go back to the start of 2016 to see a similar degree of weakness which was triggered by China’s second round of yuan devaluation in under six months.

200-day moving average

But having broken below the 200-day EMA in mid-October, last week saw the S&P 500 surge back above it (currently around 2,760) following Tuesday’s US mid-term elections. The index rose further, closing in on the 50-day EMA before once again pulling back sharply. On Friday I noted that a close below 2,760 would weigh on sentiment while a break above 2,795 (the 50-day) or, even better, the 100-day around 2,800, would be bullish. If fact, the S&P close was inconclusive as it ended the week at 2,777 – down sharply for the session, but still some way above the 200-day level.

50/100-day crossover

So, what now? Well it’s worth noting that the 50-day has crossed below the 100-day which typically indicates a change in trend from upwards to downwards. However, this isn’t the strongest signal of changing trend so it’s important to look for confirmation, something that neither the Relative Strength Index (RSI) nor Moving Average Convergence-Divergence (MACD) indicators have yet given.

Bullish trendline breach

But there’s something else worth watching – the upward-sloping trendline from the January 2016 lows. The October sell-off saw this breached significantly. However, the subsequent rally off oversold levels meant the S&P broke back above it last week. The trendline currently comes in around 2,770 so very close to the 200-day EMA. I think this is an important area to watch for the rest of this week. A determined break to either side of this trendline could either set us up for a strong rally into the year-end, or a retest of the 2018 lows.



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