Author: David I. Templeton, CFA, Principal and Portfolio Manager
The S&P 500 has fallen in each of the last three weeks, down just over -4%. This leaves the Index down -2.56% this month with just two trading days remaining. Since the market low in October, the S&P 500 Index does remain higher by 11.2%. The past three week decline has inflicted some technical damage to the market, leaving the index at key levels. As the below chart shows, the S&P 500 Index bounced off of its 200-day moving average (blue line) on Friday and closed right at the red resistance line. Also important technically is the fact the market closed below the green support line that has been in place since the market low in October. Wil lthe bulls or bears win this battle. As the bottom section of the chart shows, the stochastic oscillator is at an oversold level from which market recoveries tend to occur. Since October the S&P 500 has been stair steeping higher, tracing out higher highs and higher lows, and with its current oversold level may create another higher low, a pattern bullish market participants would favor.
Incorporating market technicals tends to be helpful in that a wide range of trading activity, including computerized trading, utilizes market technicals. In some ways, due to the volume of trading that is done using market technicals, pattern formation can become somewhat of a self-fulfilling outcome. In the long run though, I do believe business and economic fundaments drive longer term secular trends. In that regard, I hope to touch on a few economic and earnings highlights in a post later this week.
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