Simply A Technical Review Of The S&P 500 Index

Includes: DIA, QQQ, SPY
by: David I. Templeton, CFA

Quite a bit of discussion circulated after the market closed on Friday surrounding the S&P 500 Index and the resulting weekly chart candle that formed for the week. As the below candle stick chart clearly shows, a shooting star formed out of the weekly market action. One factor making this formation of interest to technical market traders is it occurrence subsequent to a strong market uptrend and the previous weekly candle was an indication of pretty strong uptrend. So, this shooting star is viewed as a bearish signal since sentiment has changed so dramatically. Downside market follow through is needed though in order to confirm a potential market reversal.

A couple of factors that may counter this bearish formation is the fact volume on down weeks has been declining. Equally important is the fact volume on up weeks has been declining as well.

From a positive standpoint, the chart pattern on a 30 minute chart shows buyers came in during the last hour and a half of trading. This resulted in the market bouncing off the 200 period moving average. The market has a tendency to fill gaps created in chart patterns and a gap above formed with Friday's lower open.

From an investor sentiment perspective, the individual investor remains skeptical of the market's rebound from the February low based on AAII's Sentiment Survey. The 8-week moving average of bullish sentiment is at a level coincident with a market bottom.

And lastly, reviewing the bull/bear spread that is reported with AAII's Sentiment Survey, the below chart shows the 8-week moving average of the spread compared to the S&P 500 Index. The level of this average of the bull/bear spread is also at levels associated with a market that is nearing a turn to the upside.

The above analysis is all based on technicals and the market certainly needs to digest other issues, like a Fed rate hike and the BREXIT vote on the 23rd of this month. From a sentiment perspective, and given the contrarian nature of this measure, investors may be too heavily tilted to bearishness. On the other hand, the technicals are giving off mixed signals and combined, these are likely to lead to continued market volatility over the next several weeks.