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As the fourth quarter is just getting started, there are several factors weighing on the minds of investors. How much will the global economic slowdown impact the U.S. economy? Will the fourth-quarter earnings reports be up to par?
These fundamental questions are on the minds of investors, but I tend to focus on the technical analysis, and there are several potential developments on the daily and weekly charts of the S&P 500 index that have me concerned.
Let’s look at the daily S&P 500 chart first. After falling sharply last Monday, the S&P has bounced back sharply and has experienced a five-day winning streak. That winning streak has brought the index back up to where the 50-day moving average is now in the picture as potential resistance.
At first glance, it looked like the S&P might be forming a head-and-shoulders pattern, with the 1,865 level serving as the neckline and the 1,995 area serving as the shoulders. But the peak at 1,995 in late August was inside the possible neckline point and it has to be on the outside.
Even without the head-and-shoulders pattern, that peak in late August and the 1,995-2,000 range are a concern as potential resistance. We see that the index closed in this range on Sept. 16, but on Sept. 17 – the day the Federal Reserve announced that it wasn’t raising interest rates – the index moved well above the range and then fell sharply and closed lower on the day. The index is just below this area again, and if it stalls below the 2,000 level we could see it fall all the way back down to the 1,865 level.
On the weekly chart, I continue to monitor the 13-week, 52-week and 104-week moving averages. We saw the 13-week make a bearish crossover of the 52-week at the beginning of September, and then the index traded below the 104-week for several weeks. The index had not been below that trend line since the fourth quarter of 2011, so that was – and remains – a concern.
We also see that the 10-week RSI reached an oversold level in August. That was the first time the oscillator dropped below 30 since the third quarter of 2011. I find it a little concerning that the slow stochastic readings didn’t reach oversold levels during the recent pullback. I would have felt better if they had reached oversold readings and then reversed.
Is there a trade in all of this? Not really – at least not yet. I do think if the index hits its 50-day moving average and struggles, you could place a bearish bet on the overall market at that time. More importantly, I think investors need to keep a close eye on how the S&P 500 chart behaves over the next month in order to get a better idea of whether the recent pullback is over, or if it resumes and turns into the next bearish phase.
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