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SP500: Pullback or Destructive Decline?

After a big sell off this week the resumption of the up-trend can be jeopardized with more follow-through. If this is the case, from the May high a large corrective pattern could still be underway which could be forming a Triangle (Bullish or Bearish).

The lack of impulsive moves both to the upside and to the downside is resulting in a murky outlook.

Breadth Indicators are now clearly signaling weakness ahead:

  • The NYSE Summation Index has triggered a sell signal. Without a breadth thrust that would reverse the bearish bias the next buy signal might occur when the RSI enters the oversold zone (Below the 30 line)

NYSE Summation Index Daily Chart

SP 500 key price levels:

a) Weekly time frame

- Support:

The range 2020 - 2013 is a critical support. If it does not hold the odds of a large decline would substantially increase (Towards the lower Bollinger Band)

- Resistance:

To the upside bulls have to reclaim the 27 wma = 2061 in order to regain the upper hand

S&P500 Weekly Chart
Larger Image

b) Daily time frame:

- Support:

The range 2021 - 2018 (Support 1) then we have the 50 dma = 2007 (Support 2)

- Resistance:

Friday's gap at 2046 (Resistance 1) and the 200 dma = 2064 (Resistance 2)

S&P500 Daily Chart
Larger Image

We have several indicators that are showing extremes:

  • Equity Put/Call Ratio (Contrarian indicator)

CBOE Options Equity Put/Call Ratio Daily Chart

  • Daily Stochastic and RSI (5) have ended the week deeply oversold

Momentum
Larger Image

  • The McClellan Oscillator is below the lower Bollinger Band and it has crossed the oversold line. The RSI (5) is also oversold

NYSE McClellan Oscillator Daily Chart

Barring a crash next Monday the short-term oversold readings should favor a countertrend rebound (Bearing in mind that the short term trend has now shifted to the downside).

 

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