Saturday, October 17, 2009

Hurdles Remain for the S&P 500

The S&P 500 has rallied strongly off the March lows vaulting nearly 65%, and yet it is still down roughly 30% from its 2007 highs. One tool used by technicians in terms of gauging key retracement levels are the Fibonacci retracement ratios of 38.2%, 50%, and 61.8%. Often counter trend moves will recover anywhere from 38.2% to 61.8% of the prior move before resuming the primary trend. However, if the 61.8% retracement is breached a full test of the prior highs/lows often ensues. If the S&P 500 can not exceed the key retracement levels of 50% (~1117) or 61.8% (~1222) of the 2007-2009 decline, then the market advance from the March lows will probably be over and then either a significant correction or prolonged consolidation may take shape.
The S&P 500 has broken through its 200d MA by a sizable margin, enough to actually cause the 200d MA to turn upwards which signals a rising market trend, which is bullish. However, the S&P 500 has not cleared the 50% retracement level yet as it did in 1930, and the 61.8% retracement level still presents another hurdle for the S&P 500 to clear before the rally off the March low could be considered something other than one massive corrective bear market rally.
While the 200d MA may be signaling a bullish primary trend as it has been rising since July, the primary price trend is still bearish. The 1100-1130 zone is likely to prove a key level for the S&P 500 as it will not only challenge its declining trend line that has been in place since 2007, but will also challenge its 50% retracement level.

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