Line in the Sand
The correction over the past 2-weeks is nearing a critical technical level in what is commonly referred as the “line in the sand” level. That is, SPX and many major U.S. stock market indexes are converging toward a common major psychological, risk tolerance threshold, and pivotal technical support.
The ability of the bullish camp to defend this key support zone may help to stabilize the recent strong selling pressure allowing for the next technical oversold rally. However, failure of the bulls to defend this major support may confirm a major market top and warn of the start of the next bear trend.
Summarized below are three SPX analyses using 3 different time frames (i.e., monthly, weekly, and daily data). It is technically significant that all three analyses are converging toward a common major technical support zone, namely the low-to-mid 2,700s and the low-2,600s or the “line the sand” level.
On the daily chart this level is 2,729-2,746.5 coinciding with the 6/3/19 reaction low as well as the right shoulder to the prior 2-year head/shoulders bottom pattern and the pivotal 61.8% retracement from 12/26/19 low to 2/19/20 all-time high.
On the weekly chart this important support zone is 2,614/2,729 corresponding to the Feb 2016 uptrend and the Jun 2019 reaction low.
On the monthly chart this critical support level is 2,729 and 2,686-2,772 or the Jun 2019 low and the bottom of the 2009/2010 structural uptrend channel.
The ability to maintain the above key support levels can lead to the resumption of the 11-year structural bull trend. Key resistance resides along 3,050-3,100 or the extension of the 2-year neckline and the 200-day ma. On the other hand, a convincing violation of these key supports warns of a major market top and signals the start of a bear market decline. Under this scenario next major support converges near 2,346-2,352 or the 38.2% retracement from the 2009-2020 rally and the Dec 2018 reaction low.