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The S&P Hit a very Important Target Today. Are we Headed for New Lows?

Today, the S&P opened straight into the 3016-3024 target we've been watching for weeks. This range is likely to act as significant resistance in the medium-long term. The reversal from it, should a reversal materialise, could be dramatic. Some other major indices hit our targets days ago and have thus far respected them. They were likely waiting for the S&P to catch up before any new major downside move can begin across the board.

Figure 1

Figure 1 shows the S&P daily chart with our target marked in purple. The market hastily rallied after the mid-March low, retracing over half of the decline from earlier this year. How likely is our target to hold? Well, I think quite likely. The price target alone looks like a strong enough price barrier to end the rally. But it isn't alone. It is corroborated by the channel line projected from the all-time high, shown in figure 2.

Figure 2

Scrolling back further reveals another significant trend channel which also cuts through the price target today. See figure 3.

Figure 3

There is a confluence of a strong horizontal resistance level, and two channel lines, all suggesting the possibility of a reversal from this level. Individually, these three factors would be relevant. Together, they could be impenetrable. Let's see what the indicators are saying. Figure 4 includes the RSI and Composite index.

Figure 4

The RSI has been failing to overcome the 60 level which often acts as resistance for RSI in bear markets. If the rally still had momentum behind it, the RSI would likely be able to exceed 60 in less than 4 attempts. It failed the first 3 times, and it may be set to fail again: this time sending the market lower. The composite index has been diverging with both price and the RSI for weeks, failing to make a new high since April 14th. The indicators seem to confirm the rally is out of momentum, and a resumption of a larger downtrend is plausible.

How low could it go? Is it really likely to take out March lows? The MACD offers a suggestion. Figure 5 is a weekly chart of the S&P with the MACD. The crash earlier this year sent the MACD down to the support zone which hasn't been hit since the housing bubble burst in 2008. The last time the MACD was this low, the world was in the height of a global financial meltdown. Last time, the MACD low wasn't the actual market low. There was another bearish leg to come which bottomed 10% lower than the MACD low. It's very possible the low in March, which also saw the MACD low, isn't the final low either. We could go lower.

Figure 5

The hypothesis that the March low will be taken out would mean that the 37% rally since was in fact merely a retracement in a larger downtrend, albeit a persistent one. Does that seem probable? Can 37% really be just a retracement? Figure 6 looks at the tech sector, which makes up 25% of the overall S&P 500 index.

Figure 6

Volume expanded heavily through the decline, but has been falling all the way through the advance that followed. We're potentially seeing market participants exhibiting a lack of interest in the upward move in more aggressive sectors, like technology. They were certainly eager to participate in the decline, though. If buying pressure has dried up in tech, it could lead the whole market back down to make new lows. The volume divergence in the largest sector component of the S&P backs up the idea that the recent advance has been a bear market rally, rather than a new bull market rally.

Markets are at a very important juncture. Should the market rise through our targets, it will be necessary to bring into play potential higher targets. That's a possibility which should be prepared for. If the target does hold, we're likely to see a serious decline from the 3020 area. There are a number of important levels along the way down which would have to be watched closely, but it certainly looks possible at this point that the market goes all the way down to surpass the March low.

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