Daring the Downside
by, 10-18-2014 at 05:10 PM (1868 Views)
Many traders watch the 200 day moving average, currently coming in at 1906.02 on the SP 500. Based on Friday’s close of 1886.76, the market is now 19.26 points below. What’s more, this is the 5th daily close below and it has not been retested as resistance. Translating this moving average to the weekly chart of the SP500, courtesy of Stockcharts™, we see the recent failure of the 40 week moving average to provide support and a trend break going back to 2010 as well. There have been dips below this 40 weekly moving average and recovery before; most recently in November, 2012 and June, 2012 where the market had seven and three daily closes below. So, the market is very vulnerable at the present time. If there is going to be a recovery it better happen soon, before the automated trading programs take over. Where there is not a quick recovery above the 40 period moving average, the weaker market has drifted down and has always retested this important average at least once before conquering, as shown by the red arrows on the chart.
The market is currently quite oversold as shown by the RSI which is way below 30 coming in at 20.45. (I have redrawn as a 5 period in order to increase sensitivity). Comparing other instances below a RSI of 30 shows a bounce back is in order. But, again this depends upon how long the market will stay below the 40 week moving average or 200 day moving average. History shows the time period is anywhere from three days to three months or more. Should a failure take hold right away, I have drawn a target cluster based on support and Fibonacci retracement from the 2011 lows that is anywhere from 1650-1700 . It also looks like there is a possibility a right shoulder needs to be built first, topping anywhere from 1930 to 1980. We should know soon which option Mr. Market selects.