WHAT TO MAKE OF THE 2019 REBOUND -- BEAR MARKET RALLY OR START OF A NEW UPLEG? -- OR PART OF A TOPPING PROCESS -- S&P 500 NEARS TEST OF 200-DAY AVERAGE AND MAYBE ITS DECEMBER HIGH -- WEEKLY CHARTS ALSO SHOW IMPROVEMENT

S&P 500 NEARS TEST OF 200-DAY MOVING AVERAGE... The daily bars in Chart 1 show the S&P 500 nearing a test of its 200-day moving average (red line). That's an important test for it and rest of the stock market. A strong stock market usually trades above its 200-day line. The SPX, however, has been trading below that long-term support line since the start of December. Another important overhead resistance barrier is the early December peak at 2800. The SPX would need to clear that previous peak to reverse the negative patttern of "lower peak and lower troughs" that also started in December when the late October low was violated. The upper box shows the 14-day RSI line reaching its highest level since September, and nearing overbought territory at 70. The daily MACD lines (lower box) are in positive territory and trading back over their zero line. That shows short-term upside momentum. [We'll study those lines in more depth shortly on longer range charts].

2019 MAY BE A RELATIVELY FLAT YEAR: The big question that needs to be asked, however, is whether the current rebound is a bear market rally. Or the start of another upleg that resumes the major bull market. A decisive close above the 200-day line, and especially the December high, might rule out the former. But doesn't guarantee the latter scenario. It's quite possible that 2019 may be more of a sideways year with major stock indexes trading between their September 2018 highs and their post-Christmas lows. One factor in the market's favor is that stocks usually gain ground in the year after midterm elections. One factor working against the market is that it will hit its tenth anniversary next month, making it the first bull market in history to reach that advanced age. That might argue against another upleg. And could leave the market trend this year somewhere in between those two bearish and bullish scenarios. Some longer range charts shown below suggest that could even be part of a major topping process.

(click to view a live version of this chart)
Chart 1

WEEKLY CHART ALSO IMPROVES... Chart 2 plots a weekly chart of the S&P 500 since the start of its last major upleg at the beginning of 2016. Big negative divergences on its weekly RSI and MACD lines last September warned of the market downturn that took place during the fourth quarter. There are both positives and negatives on the chart. One positive is that the 14-week RSI line (upper box) bounced off an oversold reading near 30 in late December which helped launch the current rebound (black arrow). It's now trying to climb back over its mid-50 line which would put it in positive territory. The lower box shows weekly MACD lines also turning positive for the first time since late September. The MACD lines, however, are turning up from the lowest level in more than three years, and have a long way to go to move back over their zero line. A glance back at the early 2016 bottom shows that happening during the second quarter of that year (green circle). The blue circle shows weekly moving average lines also turning positive by April of that year. Both weekly indicators have a longer distance to climb this year to turn positive. Chart 2 also shows that the SPX has a long way to climb to reach its broken trendline that defined its last three-year uptrend. It also shows, however, the prices found support at the 50% retracement level measured from its early 2016 bottom to its late 2018 peak. That's pretty normal and somewhat encouraging. The weekly bars show the late 2018 downturn being contained, but leave the question of upside potential in some doubt.

Chart 2

MONTHLY CHART SHOWS MAJOR UPTREND STILL INTACT ... Some writers have referred to the fourth quarter downturn as a "cyclical" bear market in a "secular uptrend". A cyclical trend is usually much shorter in duration (like three years). It's questionable whether the fourth quarter downturn qualifies as a bear market since the S&P 500 lost less than -20%. But there's no doubt that the three-year cyclical uptrend starting in 2016 was severely tested. The monthly bars in Chart 3, however, show that the nearly ten-year secular uptrend in the S&P 500 remains intact. That's shown by the fact that the fourth quarter correction remained above the rising trendline drawn under its 2011/2016 lows (green arrows). In addition, the 14-month RSI line (upper box) found support near its 50-line (black arrow). The same thing happened at the start of 2016 near the end of that cyclical correction. The last major bear market during 2008 saw the monthly RSI line fall into oversold territory below 30. Chart 3 shows that the recent cyclical correction within a secular uptrend has held and is now in recovery mode. Some monthly indicators, however, aren't as encouraging.

Chart 3

MONTHLY MACD AND PPO LINES REMAIN NEGATIVE ... Trends on monthly charts are the most important of all. That's because they measure the market's long-term secular trend. And a couple of those monthly indicators are flashing red (or at least yellow) caution signs. The top box in Chart 4 shows monthly MACD lines for the S&P 500 still in negative territory (red circle). What also concerns me is that this is the third downturn in the monthly lines since the major bull market began in 2009 (see numerals). That matters because bull markets usually have three major uplegs (based on Dow Theory and Elliott Wave Analysis). And three peaks. And we've just had the third one. The PPO lines overlaid on the price bars carry an even more serious warning.

PERCENT PRICE OSCILLATOR SHOWS NEGATIVE DIVERGENCE... The lines overlaid over the SPX price bars are monthly PPO lines. PPO lines are similar to the MACD lines, but with one major difference. Instead of measuring the difference between the two MACD lines, the PPO lines are plotted as percentages (See ChartSchool). Most of the time the PPO lines look similar to MACD lines. Their longer-range trends, however, sometimes differ. As they do now. The monthly PPO lines have also turned down for the third time in nearly ten years (red arrow). What's notable, however, is that their 2018 peak fell short of their 2014 peak. That creates a major negative divergence between the monthly PPO lines and the market's major uptrend (falling red trendline). That may not have much impact on the market's short-term trend which is currently rising. But the negative look of those monthly indicators argues against being too complacent about the longevity of the market's decade long uptrend. Negative monthly indicators may limit the upside potential in a bull market that's a month away from becoming the first one in history to last ten years. And may be an early hint that the late 2018 stock downturn was the first warning that the aging bull market could be running out of time.

Chart 4