S&P 500: Technical Analysis

The process is unfolding.

Every investor that has spent a few years in the market has watched it happen and each time, sadly, most were sucked in while forgetting each previous time.

It’s all too familiar. The market reverses from its highs and the media interviews myriad of experts asking, “Is this the correction?” Then, the market continues to fall and it asks, “Are the highs in for the year?” On Thursday, CNBC asked, “Are the Markets Facing a Crisis of Confidence?” Another headline reads, “‘These are Very Scary Times’: Dennis Gartman.” (He was talking about the currency market. Not stocks but the headline doesn’t mention that.)

You can listen to the hype or you can analyze the technicals. Let’s do the latter.

Where We Came From

This market was massively overbought. The RSI stayed at or above 70 with some stocks reaching 90. Stochastics hovered around 100 and the bull-bear spread was north of 36 percent. The S&P severely diverged from a 50 day moving average that had an upslope that was far too steep for comfort. It printed gains in six months that investors would be happy with in a year—or even two.

Every one of these metrics signal a market that is extremely overbought. There was no doubt that it was going to unwind. There was no doubt that the unwinding would be swift.

The Charts

Where are we now and where are we going next?

On Wednesday, the S&P tested its 50 day moving average currently at 1,610.55. The index successfully held the level and closed at 1612.52. The Nikkei plunged 6 percent on Thursday and world markets are tumbling with it. It will be difficult for the S&P to hold the 50 day in Thursday trading but from a purely technical perspective, that would be healthy action.

So far, the selling has been orderly. Volume isn’t high, there isn’t a mass rush into risk-off assets, gold isn’t rocketing to the upside, and the rest of the world, outside of Japan, isn’t in a panic either.

If the index breaks 1,610, the next stop will be 1,598. After that, 1,580.

The charts are saying that the selling isn’t over. That entry point everybody is looking for probably hasn’t shown itself yet. On CNBC Wednesday, Dennis Gartman also said that if stocks fall another 5 percent, he would be interested. The charts are signaling that another five percent isn’t out of the question.

Raise your right hand and vow not to sell the hype. A market correction, even if it’s severe, doesn’t mean that the bull market is over. It means that a severely overbought market can’t stay that way forever.

Of course, there’s the possibility that this could go beyond technical correction but as of now, we aren’t there so don’t trade on the advice of every CNBC guest. Watch the charts and cut out the noise.