A flag or triangle on the S&P 500 chart? That's what I covered in my last column, when we looked at potential patterns for both on the S&P. It did fall out of the bottom -- as I suppose those who look at patterns would believe it should have. But it didn't break. At least not yet. All it's done is come down to 2800 one more time. A break, or continuation of the pattern, would be a break of 2800.
By now everyone must see the obvious head-and-shoulders top in the major index charts. It's as if they come from a textbook. The Dow Jones Industrial Average has one that's the most obvious.
Then there are the round-number levels on so many indexes. There is 2800 on the S&P. There is 7600 on Nasdaq. There is 1500 for the Russell 2000 and 10,000 for the Transports.
Typically when we get to a point in the market where there are so many obvious support levels, I want to see them break. Breaks of obvious levels bring about panic, they bring about fear. And fear and panic can often make for good buying opportunities as they clean out sellers.
A week ago, the intermediate-term indicators were not oversold. But at least they were no longer overbought. Let's update them, because if we can break under 2800, some of them will be moving much closer to those oversold readings.
The Volume Indicator doesn't move quickly. It now resides at 48%. Readings in the low- to mid-40s are considered oversold. So a break under 2800 could get it there.
The Hi-Lo Indicator was in the mid 40s a week ago. Now Nasdaq's is at 36%. A reading under 20% gets this intermediate-term indicator oversold.
Thursday's trip down to 2800 on the S&P saw a spike in stocks making new lows, to 179. If - and this is a big if - the S&P breaks 2800 and there are fewer than 179 stocks making new lows, it would be a minor positive divergence.
The McClellan Summation Index is still heading down, having made its high in late February and a lower high in mid April. The only positive takeaway is that here we are staring at 2800 on the S&P, and it only needs a net differential of +1500 advancers minus decliners to halt the slide. The last time the S&P was down at 2800 it needed +3600 to halt the slide.
The 10-day moving average of the put/call ratio has already rolled over, something it tends to do nearer to lows than highs.
The American Association of Individual Investors' weekly survey shows a massive shift in sentiment, with bulls now near where they were in late December (25% now vs. 21% in December). I always prefer when other surveys confirm the AAII survey, because it's so volatile. We have not seen that yet, but a break of 2800 would surely move the needle on some of them.
But let's get back to the original discussion about the chart of the S&P. It's always a Rorschach test. Perhaps you see that flag or triangle I wrote about a few days ago. Or you see the head-and-shoulders top. Or do you see the potential for a gap fill (arrow on the chart), before we head back down again? Those are the bearish scenarios.
The bulls might see the W pattern.
I say let's let the indicators guide us.
