Taking a Breather

Markets began showing signs of fatigue yesterday after reaching a significant junction of major technical levels. Long story short, the S&P 500 ran headlong into resistance at the 125 day moving average, 1946-49, and promptly sold off into the afternoon, closing near the lows. While there is more to the story, first, the short view:

S&P500 on a 3 minute plot.

S&P500 on a 3 minute plot.

As you can see, it was shortly after peeking its head out above the 1946 level (125 DMA) ┬áthat the groundhog saw ┬áhis shadow…err, that is, the market got spooked, quickly selling off. The most notable feature of the selloff is the speed with which it developed into a well defined, orderly downward channel persisting for the remainder of the day, one that frankly bears all the hallmarks of a major inflection point with continuation potential.

That the selloff began after both the EIA US crude oil stockpiles report sent crude tumbling, and the tragic shootings in Ottawa (our deepest condolences to the families of the victims) suggest that the selloff may be temporary, and may have just been a well needed pause that refreshes after a sharp snapback rally. Supporting this case is a move higher in the E-mini S&P futures this morning.

S&P 500, 3 hour chart.

S&P 500, 3 hour chart.

Stepping back, though, its clear that yesterday saw the intersection of multiple major technical levels. Firstly, as was mentioned before, the 125 day at 1946, which has been a significant level since late 2012. Secondly, the upper resistance originating from the September highs, which may or may not prove to be of any special significance. Thirdly, the uptrend from the lows last week, which remains intact, though barely after the selloff yesterday came close to violating the channel. Whether it does or not is less important than keeping price behavior in the context of all these technical crosswinds in mind, and watching for signs of a stall out or reversal.

S&P 500, daily chart.

S&P 500, daily chart.

We remain in the pocket, so to speak, the range between the 200 day and 125 day moving averages. This is still a vulnerable level, technically, and for major upside continuation, we need to see a breakout from these level in short order. Prolonged churning in this range puts pressure on levels that often give way to selloffs, and raises the likelihood of a new leg downward in what some have proclaimed to be the beginning of a bear market.

Such proclamations are premature, but the next few day are likely to prove decisive, one way or the other.

-Will Mogey (Twitter: @wtmogey, StockTwits: @wtmogey)

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