MONDAY'S UPSIDE REVERSAL DAY MAY HAVE SIGNALLED SHORT-TERM BOTTOM -- THAT COULD LEAD TO DECEMBER REBOUND TO OVERHEAD RESISTANCE -- A STUDY OF SMALLER OR EQUAL WEIGHTED INDEXES SUGGESTS A RETEST OF EARLY 2018 LOWS MAY HAVE ALREADY TAKEN PLACE
S&P 500 MAY BE FORMING SHORT-TERM BOTTOM... My message from last Friday suggested that the S&P 500 was likely to drop below its October low, which could lead to a retest of its early 2018 lows (more on that last point shortly). Chart 1 shows Monday's early price drop pushing the S&P 500 to the lowest level since early April on an intra-day basis. By day's end, however, stocks had reversed higher which prevented a more serious breakdown. And it may be suggesting that the market is probing for a short-term bottom. That would fit into the normal seasonal bounce during December which usually leads to a Santa Claus rally during the final week of the year. One indicator supporting a short-term bottom is the 14-day RSI line (lower box) which has formed three rising bottoms since late October. Those "positive divergences" hint at a seasonal rebound from current levels. The SPX still faces formidable overhead resistance at its 200-day average (red line) and resistance at its early December and November peaks at 2800 and 2815 respectively. In addition, longer range technical indicators still suggest that the more than nine-year bull market is probably peaking. Which further suggests that any yearend rally would still likely be part of a broad topping process. And that, in turn, raises the odds that 2019 is likely to be a much tougher year for stocks.
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Chart 1
NOW ABOUT THAT TEST OF 2018 LOWS ... A number of us have been calling for a retest of the early 2018 lows to determine if the bull market is still intact. That would be a very important test. Because a bull market correction should find support there; while a decisive drop below that previous low would likely signal a bear market. The question here is whether that test has already taken place. Chart 2 shows Monday's intra-day low for the S&P 500 at 2583 still 30 and 51 points above its April/February intra-day lows at 2553 aand 2532. That's less than 2% from those earlier lows. And it came within 2 points of their earlier closing lows at 2581. So a case can be made that those lows have already been tested. A move convincing case, however, can be made by taking a broader look at some other stock indexes besides large-capitalization market indexes like the S&P 500. Chart 3 shows the S&P 600 Small Cap Index coming within 9 points of its February intra-day low. While Chart 4 shows the S&P 400 Mid-Cap Index trading back over its early 2018 intra-day low at 1770. It seems fair to say those two indices of smaller stocks are already testing those earlier lows. If they're going to start bouncing, this would be the time to do it. Which might also be said for the rest of the market.
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Chart 2
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Chart 3
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Chart 4
S&P 500 EQUAL WEIGHTED INDEX IS ALREADY THERE ... Chart 5 shows the S&P 500 Equal Weighted Index trading within 7 points of its February intra-day low at 3846. In my book, that's close enough to qualify as a retest of a previous low. As its name implies, that version of the S&P 500 gives less weight to larger stocks and more to smaller stocks. And since smaller stocks have been much weaker this year, it may be giving a more realistic picture of the market as a whole. And it suggests that the February lows are already being tested and appear to be holding. Which may provide enough of a floor below an oversold market to support a yearend rally. That's not an all clear signal for the nine-year bull market to reach new highs. If longer-range technical indicators are correct (and I believe they are), any rally from current levels would most likely be part of topping process. The 14-day RSI line (lower box) also shows two rising bottoms since October which forms a "positive divergence" from the weaker price action. That's another favorable sign that stocks are forming a short-term bottom. That would make for a brighter holiday season.
