I Think I Can, I Think I Can…

Surprising almost everyone, considering the severity of the pullback (almost 10% peak-to-trough), the S&P has had one of the best weeks in almost two years. Woo hoo, if you were long, that is. Since the bounce off of the lows on Oct. 15th, we’ve seen a nice, orderly trend channel develop, and the market, like the little engine that could, climb gradually all the way back up very nearly to the 50 day moving average, with a few fits and starts thrown in for good measure.

S&P 500, 3 minute bars

S&P 500, 3 minute bars

Against all odds, we’ve generally maintained a course from the lower left to the upper right, broken out above critical level, and stayed within the trend channel. Whats not to like? A few things, really, the most important of which is the fact that we’re leaning on the lower edge of the channel more and more, almost like a crutch. It speaks to some near term weakness that might prompt a retest of some significant support below 1950.

This shouldn’t come as a surprise, though, and should generally be regarded as healthy. We’re due now for a reset of the near term trend, and if longer term support levels near below us hold, most importantly the 125 day moving average at 1946, it may set us up for a run at the Sept. highs and beyond.

S&P 500, daily bars

S&P 500, daily bars

Looking at the daily chart, its clear the area between the 50 day and 125 day has been a place for the market to pause and set up a base for its next move higher at regular intervals in the past few years. It would not be a stretch to expect the same this time, too. That said, if we were to see a renewed bout of volatility, the 50 day moving average at 1967, by now firmly downward sloping, would be a logical inflection point for the bears to make a stand and turn the market decisively around.

Fundamentally, there are plenty of data points to bolster either case, but as always, price action will inform how we position for the coming weeks. On a pullback, be wary of a close below 1946. A close above 1967 open up further upside. Good luck out there, and have a great weekend.

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

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