S&P500 Testing Key Fibonacci Support
We've seen a 9% correction in the S&P500 since the April 2nd highs. That's not so bad after a 30% move in six months, right? Seems pretty normal to me. But have we seen enough to get a new rally going from here?
A month and a half ago the S&Ps broke their uptrend for the first time since October. We put up a post that day with Fibonacci retracement levels that could come into play as prices corrected. We said that day,
'The number that stands out to me is the 1288-1290 area, for multiple reasons. First of all, this is the most obvious cluster of retracements: 38.2% retracement off the October lows, 50% retracement off the November lows, and 61.8% retracement off the December lows. Secondly, the late October highs that were not taken out until mid-January are right at these same levels. And finally the upward-sloping 200 day moving average should catch up to this area by the time prices get down that low (if they get down that low). This would represent a little bit under a 10% correction, keeping the set back in the 'normal and healthy' category."
This was the chart we were watching at the time:
*Chart from April 9, 2012
And 6 weeks later, here we are testing that important support. Will it hold? So far it has. But we're getting some oversold readings in the Relative Strength Index that don't convince me that we'll be ripping to new highs from current levels. Could the lows be in? Sure. But that doesn't mean we won't see some further consolidation in equities before the next leg higher can really get going.
In early April, we put up a post warning that the Bearish Divergence in momentum made stocks vulnerable. As the S&P500 was making new 52-week highs, RSI was already rolling over and making lower highs. Sure enough, that was the top.
The problem we currently have is that we're still not seeing any Bullish action out of our momentum indicators. In fact, RSI reaching oversold conditions is evidence of an extreme amount of sellers. We don't take that as a good thing. So going forward, we just want to see last Friday's lows hold because as we mentioned 6 weeks ago, this looks to be the most important support zone.
Look at the late October highs in the S&P500. We tested that former resistance successfully on Friday. So far, the market is following through this week, which is good. We may get some more of a pop out of this market, but I won't be convinced of a new leg higher this summer unless we start to see some better action out of the more offensive sectors.
Look at the outperformance in the Defensive areas since early March - Utilities, Staples, and Healthcare all leading the way:
This chart shows the relative performance of each sector to the S&P500. Notice how the names you want to lead in a bull market simply have not. Until that changes, defense is key. Monday, some of the offensive sectors are leading, specifically the commodity based, more cyclical areas: Energy, Materials, and Industrials. Tech, Financials, and Discretionaries are also outperforming while the defensive sectors mentioned before are all struggling to stay positive. We want to see more of this sort of action and Friday's lows hold in order for us to get more positive on equities.
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