The S&P 500 dropped below the 50-day EMA intraday yesterday, but managed to close just above it at 1174.66.  This is the first test of the 50-day EMA since January, where it failed.  Prior to that the bull market was able to hold at the 50-day EMA for the most part.  That makes the rest of this week important.  As you may know, we like to see at least 3 days below a trend line or EMA before we are convinced of a trend change.  Unfortunately, the damage could be severe if you are in the market while waiting for your answer.
               
                       Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk 

After the 2000-2002 bear market, the S&P 500 saw a pretty consistent rally with each test of the 50-day EMA holding during the first 12-months after the low was made.  At that point a consolidation period started which lasted for about 8-months before the bull market resumed. 
                        
                       Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The current rally off of the March 2009 low has lasted 13+ months and perhaps we are due for a more intermediate-term consolidation like we saw in 2004?  The buy and holders have done well during this 13 month rally, but it may be time for the "timers" to have their shot.

Taking a look at a weekly chart of the S&P 500, there is reason to believe this is some kind of an intermediate-term top, as the 200-week simple moving average may be a tough nut to crack.  A pullback from here seems reasonable, but I still want to see how the 50-day EMA plays out.


                       Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The Dow Transportation Index pulled back sharply as well, 3.8% on the day, but has strong support near 4500, where the 50-day EMA meets the old upper resistance line, which could act as support.

                       Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The NYSE moved to its most oversold level since the January correction, but it is still not at an extreme oversold reading, although it is near the bottom of a descending channel.


                       Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
 
We have seen this market hang on for months while the news was not always good.  The situation in Europe, Greece in particular, just keeps coming back to stick thorns in the side of our market.  Just when you think they have a solution, the problem sticks its head up again.  Of course we have our own issues here at home with deficits and spending, immigration, terror plots, Goldman Sachs, etc., but the market has only now started to crack under the pressure.

The S&P 500 index is at very interesting point.  We could either hold at the 50-day EMA and the market will rally from here - at least in the short-term - or the 50-day EMA will break and we may be in for an intermediate-term correction.  We should know by the end of the week.  Hopefully it won't be too late to react by then.

Thanks for reading.  We'll see you back here tomorrow.

Tom Crowley