The S&P 500, a measure of 500 of the largest publicly traded U.S. companies, is arguably the most closely followed index for traders and investors. A recent rally in that index was followed by a pullback, leaving investors at a crossroads.
I recently wrote about a level of massive support on this chart, in the 3940-3975 area. That area is now being tested, and the outcome of this struggle between bulls and bears is very much in doubt.
We have reached an inflection point, and the winner will assume control in the near term. Let's view the technical areas traders and investors need to watch this week.
Technically, the S&P 500 is at the low end of its bullish channel (green dotted line), where it may be forming a second higher low (HL?). In order to confirm that higher low, the S&P 500 needs to remain above the December lows, which are in the vicinity of 3800 (shaded yellow).
Source of charts: TradeStation
On Friday, the large-cap index found support on its 200-day moving average (red). Friday's low of 3943 was just three points above that moving average, currently located at 3940.
Based on the last 14 trading days, the index trades in an average true range of 58.52 points per day (bottom right). This means buyers stepped in on Friday when the index was just 5% of its average daily range away from that moving average.
Due to Friday's bounce from 3943 and subsequent rally to Monday's high of 4018, it's my belief that the 200-day moving average is now the key to this chart in the near term. The S&P 500 has managed to stay above that moving average since Jan. 19. On Friday, a large buyer or buyers stepped in just as the price was nearing that indicator.
Zooming in on the activity of the past few weeks, the bulls and bears are in an even-strength struggle for power. Specifically, I'm looking at the wicks on the last four candles (circled). Those candles represent trading activity from Feb. 22 through Feb. 27.
The wicks on those four candles indicate that neither side can gain the upper hand. Long wicks on the bottoms of two candles show the bulls pushing back against bear incursions. The long wick on the top of Monday's candle shows the bears smacking down an attempted rally by the bulls.
The amateur move here is to try to guess the winner. The proper attitude is to wait and see which side gains the upper hand. Grab your popcorn, kick up your feet and get ready for the sparks to fly.