S&P500 Enters Over-Bought Territory

Last week was another strong showing for the SPX in 2019.  In fact, so far, there have only been 3 negatives closes for the year.  The last time we saw the markets start this strong was… oh yeah, last year.  Then, in February, everything tanked.

This is not to say that everything is gearing up to tank again.  But it is to say the markets may be getting out ahead of themselves a bit.

Perhaps the biggest difference between 2018 and 2019 is where the markets have been.  After 2017’s strong upward move, the markets were still pushing higher.  After 2018’s late-year collapse, the markets are still recovering.

From a technical perspective, we’re now in a fragile zone.  The fundamental data is holding thus far.  So a bottom may have been put in on Christmas Eve 2018.  Typically you’ll get some kind of pull-back — or even a re-test — after the drop and bounce the markets have just experienced.  The key is where to measure from.

The low on Christmas Eve of last year is a pretty easy spot to peg on the charts.  From that point, we saw a v-bottom recovery up until today.  How high this initial bounce goes is yet to be determined.  As of last Friday, the SPX crossed above its 50-day moving average.  However, it’s still below it’s 100 and 200-day moving averages.

If a relatively typical 50-percent retracement were to occur at this point, we could measure between either the 50, 100, or 200-day moving average back to Christmas Eve.  Doing this, we get either 2554, 2548, or 2495.  We can also toss 2516 in there based on last Friday’s close.  That’s anywhere from a 4.3-to-6.5 percent pull-back from Friday’s close.

What happens if support fails at these levels?  Well, it gets tricky.  There’s sort of a last-resort number at 2480.  But if that level gets violated, we’re looking at 2408 or a full-blow re-test of the Christmas Eve lows.  We do not want to discuss the outcome if the markets hit a lower low.  Let’s just say we could be partying like it’s 1999…  or maybe 2150.

What happens if we don’t get a pull-back at all?  Outcome unclear.

If there is no pull-back, presumably it’s because we’ve seen a material shift in expectations for the economy.  As of now, people are on the look-out for recessionary signals.  So anything that pushes that probability farther out into the future would be greeted as good news to this markets.  And we could see a drive even further towards the 2825-2884 range — or perhaps significantly higher.

So enjoy the January effect.  But before you get too excited about the possibility of a market melt-up, let’s all take a deep breath and see if we can breach the 200-day moving average and close above this level for a couple weeks.  That would be a strong signal that the Christmas hangover was behind us.  Until such time, we’re not out of the woods on this thing yet.

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