- Dugald Malcolm

Montreal, Canada

The S&P 500's trend continues to be downward, despite recent movement to the upside. Formidable levels of resistance have contained the recent rally, preventing it from regaining the peak levels made back in January.

Since my last update at the beginning of the month, the S&P 500 managed to break through support again at the 1,084 level on February 4th. It then went on to put in a subsequent intraday low of 1,044.50 the next day. Had it closed at this level, it would have represented a 9.2% pullback from the high of 1,150.45 made back on January 19th. Instead, it closed at 1,066.19, forming a bullish hammer on the candlestick charts. Despite putting in a slightly lower close the next day, the bullish hammer was confirmed with a rally back up to retest the level of resistance formed back in November and December near 1,115. That level, coupled with the 50 day moving average, now at 1,108.81, seems to be doing a good job of preventing any push higher.

Although the closing lows put in earlier this month were 8.1% off the highs, it is still not the 10% or higher level which typically defines a stock market correction. For this, we would need to see a pullback to at least the 1,030 level, where the 200 day moving average now resides. Eric and I have been looking for a correction for some time now. We have had little faith in this rally that has now only given us only four minor pullbacks greater than 5.4% since the March lows. Without an official correction, investors tend to become overly sanguine and complacent, bringing markets much higher than they should be. More often than not, when investors become greedy, the astute investor should become fearful.

Signs that this recent rally might be on its last legs are starting to show on the chart above. First off, the rally was accompanied by lower than average volume, which does not bode well in establishing the validity of the move. Next we see that the stochastic oscillator is rolling over. A bearish signal is typically generated when the %K (in black) crosses through the three period moving average, or %D, (in red). Also, the Moving Average Convergence Divergence, or MACD, is showing some signs of weakening. Despite the rally, the MACD has failed to push through the zero. When the MACD is below zero, the short-term average is below the long-term average, which lends credence to the assumption that the momentum is still to the downside. Let's just see if that momentum is enough to get the S&P 500 to the downside target of 1,030.