The oversold bounce that occurred 3 weeks ago when investor sentiment was
extremely bearish did one very important thing: it put a floor under this market.
Figure 1 is a weekly chart of the SP500 with the red dots serving as key pivot
points. Key pivot points are the best areas of support and resistance. The
bottom that was carved out 3 weeks ago has put in a key pivot point at SP500
1267.71 (see blue up arrows on chart ). This is support. Back testing on this
asset and on multiple assets shows that breaks of support levels generally
are an ominous sign. Therefore, I would view a weekly close below SP500 1267.71
as a bad sign. Why? Because the definition of a down trend is lower highs and
lower lows, and support levels that fail lead to lower lows.
Figure 1. SP500/ weekly
Does it always work out that way? Of course not. Last August, there was a
close below a key pivot level or support level (see black up arrows on chart),
and the market situation was dire until Ben Bernanke announced QE2. The market
reversed and never looked back.
SP500 1267.71 is the line in the sand. Closes below this level would have
me very cautious. A close below this level and a close back above this level
would be bullish. Of course, we will see how the market action unfolds and
allocate accordingly.
Disclaimer: Guy M. Lerner is the editor and founder
of The Technical Take blog. His commentary on the financial markets
is based upon information thought to be reliable and is not meant as investment
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