Monday, February 7, 2011

$SPX - One Trendline

One trendline provided support and resistance during the entire rally in $SPX since July 1, 2010.  Notice how price stayed above and found support on the trendline during the months of September and October 2010.  Then price broke down through the trendline in November 2010, and since then has been grinding up underneath the resistance of the trendline.  It has been one giant backtest!  

Importantly, today was the first day in weeks that price was able to touch the trendline again.  Notice also how the red declining days are becoming larger as the rally from November has continued. 

The blue lines represent Fibonacci fan lines.  Keep an eye on these lines to watch where bounces may occur.  There is a lot of air to the first fan line so that could result in a sharp decline.  The main cluster of support occurs in the 1100 - 1140 range for $SPX.  Ultimately, there may be a test and bounce up from the red support line before further declines.

The market behaviour from the March 2009 bottom has been unusual.  The market has not experienced a rally of this magnitude since the period of the Great Depression during the 1930's.  Therefore, it makes sense to look closely at the 1930's to see how the market may act as it enters the next bear phase.  Some of the trendlines in these charts are based on similar patterns in the 1930 period, and I will have further analysis on this in upcoming posts.   

Here is an example of how unusual this rally has been. 

As of last week:

BULLISH Sentiment as measured by AAII has been above its historic average for 22 consecutive weeks, the second-longest period ever.

Daily Chart

A closer look:

Daily Chart

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