Mid-Term Technical Analysis on the S&P 500 E-Mini Futures

Technical Analysis is a tool that many people on Wall Street utilize to profit in the stock market. It uses past price data and different indicators to predict future price movements. Behavioral economics and quantitative analysis are also included in the umbrella of technical analysis. The efficient-market hypothesis refutes the usefulness of Technical Analysis, as well as fundamental analysis, as it claims prices in individual securities are inherently unpredictable. However, both fundamental and technical analysis becomes a sort of self-fulfilling prophecy, as if enough people believe in it, it will influence stock prices.

Over the past few months, we have seen unquestioned volatility in the United States' stock markets, as well as abroad. Within the last three months, the S&P 500 has tumbled about 9.5%, and as much as 16%, as the problems in Europe and America continues to unfold. The recent volatility and price decreases have been foreseen by looking at the charts, as the S&P 500 began creating a Head-and-Shoulders pattern from about February and completing the pattern in August. By the second week of August, we saw the S&P 500 break below the neckline of the Head-and-Shoulders pattern. The projected move – after the neckline was broken – was for a decrease of about 10%. The market moved lower by about 12% from the neckline. Pretty good projection.

The S&P 500 has been stuck in a down-trending channel within the last month and a half. Currently, the market buoys toward the top of the channel, looking to break through, which could cause overall markets to move higher. However, the top of the channel is seen as a strong near-term resistance level. Likely, the move will be a bounce down from this level, before rebounding to break above it. Along with the down-trending channel acting as resistance, markets are also stuck at the 38.2% Fibonacci Retracement level. There are many global-macro factors that can cause markets to move, and with the VIX (the Volatility Index) currently above 30, markets could behave unfavorably. Mid-term global-macro factors include the EFSF vote in Europe, the start of earnings season this week in the United States, and other countries abroad at risk of possible downgrade, or worse.

After yesterday's pop, the S&P 500 closed above the 50-day moving average for the first time since July 27th, a positive sign; however, since the move was on below average volume, technicians worry. Technicians would like to see the S&P hold above the 50-day moving average for the rest of the week. A break and close above the down-trending channel could reverse the downside pressure and relieve volatility, but be aware that any major news coming domestically or abroad could cause any move to reverse and break down. If the market breaks above the down-trending channel, more resistance comes around the 50% Fibonacci Retracement level, about $1223 in the S&P 500 E-Mini Futures. If the S&P 500 cannot stay above the 50-day moving average, likely support comes around the $1,155 level, as there have been four prior price-gaps in the last couple months at this level. Below the $1,155 level, weaker support is at the $1,130 level, and below that equates to the previous low, at $1,068, or to the bottom of the down-trending channel. The week ahead should be interesting.