WATCHING S&P MOVING AVERAGE LINES -- NEGATIVE WEEKLY INDICATORS
CAUGHT BETWEEN TWO LINES ... There's good and bad news on the daily S&P 500 bar chart. The bad news has to do with the fact that the S&P is still trading below its red 200-day moving average line. Although not every break of the 200-day line ensures a bear market, every bear market starts with a break of that support line. The good news is that the index is still above the green 400-day (80-week) moving average line which I've described before as a more reliable long-term support line. Expectations for a fourth quarter bounce are balanced against the possibility that the market is on the verge of a major downturn. What to do. I'd suggest watching the two lines. In order for a fourth quarter rally to start, the S&P needs to close above its 200-day line and its early September low near 1200. If it can do that, the short-term picture will improve (but not necessarily the longer range one). If the S&P breaks the green line, the market will have taken turn for the worst and odds for a meaningful fourth quarter bounce are greatly diminished. Unfortunately, most of our weekly indicators are still in negative territory. Until that situation improves, downside risks still outweigh upside potential.
Chart 1
NEGATIVE WEEKLY INDICATORS ... I recently did an article showing that the weekly MACD lines had turned negative. I've been asked which other weekly indicators have done the same. Some of them are shown in the next chart. The top line is the 12-week Rate of Change (ROC) indicator which is trading below the zero line. Just below that, the weekly stochastic lines are falling. Below that chart I've plotted another indicator that measures buying and selling pressure. The red and green lines are Directional Index (DI) lines. A negative reading is in effect when the red line is trading over the green line, which is currently the case. That's only the second time that's happened this year. The black line is the Average Directional Index (ADX) line. A falling ADX line implies a directionless market without any major trend. A rising ADX lines signals the possible start of a new trend. Right now, the black ADX line is starting to rise which suggests the possible start of a new downtrend. Virtually every weekly indicator that I track is in negative territory. That doesn't guarantee a market downturn, but it puts the market in a high risk position. The blue line overlaid on the weekly bars is an exponentially smoothed 80-week average. That's a slightly more sensitive version of that long-term support line. The market rose above that line in the spring of 2003 (blue circle) and confirmed that a new bull market had started. The S&P bounced off that support during downside corrections in the summer of 2004 and the spring of 2005 (blue arrows). The S&P is now testing that line for the third time. In technical work, the third test of anything is usually the most dangerous.
Chart 2
