After a reassuring surge in October, the S&P 500 has spent most of the month of November headed in the wrong direction. The bull market is approaching its seventh anniversary in March, China’s economy is on shaky ground and the Federal Reserve could begin its next rate-tightening cycle any month now. This confluence of market risks has many traders watching closely for any signs that November’s trading action could be more than just market noise.
Here’s what the charts have to say.
One of the most basic technical definitions of a bullish trend is a chart where each successive peak is higher than the previous peak. A 4.3% decline like the one the S&P 500 has endured since its early-November peak is nothing to be concerned about in itself. However, a look at a longer-term chart shows exactly why technical traders are worried.
When the S&P 500 crashed from its all-time high of above 2130 to 1867 back in August, there was certainly fear in the market. Fortunately, a couple of bullish developments followed that move. First, a re-test of the 1867 support level in late September held firm, establishing a double bottom. Second, the 1867 low established a higher low than the 1820 low reached during the market correction in October of 2014.
Traders cheered as the S&P 500 recovered above the 2100 level in late October, but what has happened in the weeks since could be a major bearish sign. The November S&P peak of 2116 fell short of the previous peak of 2134.
After a constant stream of higher highs in recent years (green lines in the chart), the S&P 500 tried and failed three times this year to penetrate the 2134 resistance level (blue line) and may now have established its first lower peak (red line), the tell-tale sign of the end of a bull market.
The two key levels to watch from here will be a breakout above 2134, signaling a resumption of the uptrend, or a break-down below 1867, which would establish the first lower low and confirm that the market could be in for a long ride down.
Fortunately for traders, the charts of certain sector ETFs have not yet exhibited the same type of technical weakness that the S&P chart is showing. The Technology SPDR (ETF) (NYSE: XLK), the Consumer Staples Select Sect. SPDR (ETF) (NYSE: XLP) and the Consumer Discretionary SPDR (ETF) (NYSE: XLY) all broke out to new all-time highs during the November surge, a bullish sign that there are still areas of technical leadership in the hobbled market.
It should come as no surprise that all three of these sector ETFs have outperformed the S&P 500 so far in 2015. Assuming that the S&P can remain above the 1867 level in weeks to come, these three sectors will likely continue to lead the push to new all-time highs.
Disclosure: the author holds no position in the stocks mentioned.
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