MONTHLY CANDLES FOR THE S&P 500 -- LONG-TERM BREADTH REMAINS BEARISH -- DEFINING A COUNTER TREND RALLY -- AMAZON AND APPLE REACH KEY RETRACEMENTS

LONG-TERM OUTLOOK FOR THE S&P 500 ... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

In yesterday's commentary, John Murphy showed how the difference between two long-term moving averages can help determine the long-term trend. I would like to expand on this long-term theme using the S&P 500 with a key breadth indicator. First, Chart 1 shows monthly candlesticks for the S&P 500 with the 24-month moving average. There have been two crossovers since 2003: a bullish crossover in the summer of 2003 and a bearish crossover early this year. The bullish crossover lasted over four years, while the current bearish crossover is less than four-months old. Relative to the prior bull signal, this bearish signal is quite young. Before leaving this chart, notice how the 24-month moving average acted as support in 2005 and 2006 (green arrows). With the index trading below this moving average, it now acts as resistance around 1408.

Chart 1

A BREAKDOWN IN LONG-TERM BREADTH... Chart 2 shows the S&P 500 with the percentage of NYSE stocks above their 200-day moving averages. As with the AD Line, AD Volume Line and Bullish Percent Indices, this is a breadth indicator using simple logic. Technically, a bullish bias prevails when more stocks are above their 200-day moving averages (i.e. the indicator is above 50%). Because the 50% line acts as support in an uptrend and resistance in a downtrend, there can be some whipsaws around the 50% line. To filter the signals, I look for a move above 60% for a bullish bias and a move below 40% for a bearish bias.

Chart 2

The indicator surged above 60% in April 2003 for a bullish bias and remained above 40% until August 2007. As with the moving average crossover, this bullish signal lasted over four years. With a decisive move below 40% in January, the indicator is back on a bearish signal. A move above 60% is required to reverse this signal and put the bulls back in the driver's seat. Notice how the indicator failed at 60% in October (red arrow). With the S&P 500 below its 24-month moving average and this breadth indicator bearish, the long-term outlook for the S&P 500 is bearish until proven otherwise. One can never know how long a signal will last or how far the market will go. The best we can do is to identify the signal and position ourselves accordingly. StockCharts users can click on this chart to see its settings and save it to their Favorites lists.

S&P 500 FORMS RISING CHANNEL... With the long-term trend down, rallies are expected to form lower highs because they run counter to the bigger trend. However, picking the exact time and place for a reaction rally to end is a tall, if not impossible, task. John showed the key retracements yesterday and resistance from the October trend line. These levels give us a good idea of where to expect a counter-trend rally to end. For some timing, we can look for a pattern as well as support to define the rally. On a closing basis, the S&P 500 forged lower lows and lower highs from November to March. After finding support in mid March, the index mounted a rally over the last few weeks.

Chart 3

Chart 4

The index advanced from 1275 to 1390 with a series of higher highs and higher lows over the last seven weeks. Not a bad rally, but it's still in the context of a larger downtrend. By adding some trend lines to this rally, it looks like a rising channel or large rising flag. In addition, the mid-April low marks support around 1325. A move below the lower channel trend line would be negative and a break below the mid-April low would reverse this advance.

APPLE AND AMAZON HIT RETRACEMENTS... Apple (AAPL) and Amazon (AMZN) report earnings after the close on Wednesday and both are trading near important retracements. These two weigh heavily in the Nasdaq 100 and the reaction to their results will affect the technology sector. On Chart 5, Apple broke support with a sharp decline in January-February. After firming around 120, the stock rebounded with a rally back to broken support, which now turns into resistance. In addition, the rally retraced 62% of the prior decline and this is another reason to expect resistance near current levels.

Chart 5

Chart 6

Chart 6 shows Amazon with a similar setup. AMZN also broke support with a sharp decline in January-February. The stock turned on a dime in early March and surged back to around 80 over the last 7-8 weeks. While certainly an impressive advance, the stock is now trading between two key retracements (50% and 62%) that could signal resistance.