Weekend SP 500 Overview

Sep 28, 2008: 12:03 PM CST

Although volatility and volume were less than the previous week, we still had some wild swings that left some traders confused and frustrated at the seeming ‘randomness’ of last week’s equity index action.  Let’s take a quick look at the S&P 500 and see if we can glean any clues from that action.

S&P 500 Daily Chart:

The larger structure shows price is still in a confirmed and clean downtrend on the daily chart, with no sign of strength yet in terms of shifting the trend (no higher high or higher low yet, or break above key moving averages).  This remains the dominant structure until price breaks above the 20 and 50 day EMAs.

Price appears to be embarking on a counter-trend retracement swing up to test moving average resistance, and appears to be failing to break above these key averages – resistance comes in at the 1,220 to 1,250 zone.  A break above this zone would be bullish, and a break above 1,300 (the prior swing high) would be supremely bullish.  Until then, we have to keep looking down as the higher probability play.

Also, note that momentum made a new low in September, indicating the potential that a new price low is indeed an upcoming possibility.

Keep in mind the market is focused on news, especially word of the Economic Bail-Out plan in Congress, and should that come to resolution Sunday or Monday, the Equity Markets would be expected to rally sharply – in absence of a plan, they would be expected to fall – perhaps precipitously.

On to the weekly structure.

S&P 500 Weekly Chart:

Despite all the wild volatility of the last week, the “wave-like” trend structure is clean and apparent – sometimes you have to raise the time frame to a higher level to discern the technical (chart) structure and realize that one week often does not break the higher time frame structure.

Price is also in a confirmed and pervasive downtrend on the weekly chart (lower lows and lower highs) and is beneath the key 20 and 50 week EMAs which are in a bearish orientation.  Price recently found key resistance at the 1,300 level, which was the area of the declining 20 week EMA.

Price is in a precarious position, having made a key swing low beneath 1,150 on a ‘spike’ basis which could turn out to be a key reversal – but we’d need more bullish price action to help confirm that status.

Notice the Momentum Oscillator forming higher lows, which is good news for the bulls as this is a multi-swing positive momentum divergence.  Momentum also made a higher low on the recent ‘plunge’ to 1,150 but the way the oscillator is calculated (using closing prices to form the 3 and 10 period EMAs), the intra-week spike will not be calculated in the indicator so keep this in mind as a potential caveat.

It’s a bit premature to signal the “all clear” and it’s probably best to be in a holding period still until Congress works out the Economic Bail-out bill for better or worse.

Until then (and even after), continue to keep risk management and capital preservation as your #1 goal.

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