S&P 500: in an uptrend, interim pullback likely

S&P 500 Chart showing RSI, Stochastics, MACD, Volume and accumulation/distribution line to analyze the uptrend

Today’s chart is a daily chart of the S&P500. Even on this close-up view, you can see that the market is in an uptrend. Higher highs and higher lows, and the slope and level of the 200 day MA (dashed green line) verifies this trend. You’ll also note that the all-important cumulative moneyflow (Advance decline line) on the very bottom pane is trending up. That indicator suggests that money is entering, not leaving the stock market.

 

However, there are a few indications that the market may be ripe for a short termed pullback soon. They are:

 

  • Seasonal tendencies: As the godfather of Canadian seasonal studies, Don Vialoux notes “The usual period of summer weakness from Mid-June to Mid-October has arrived. The Dow Jones Industrial Average and S&P 500 Index probably reached an intermediate peak on June 19th”
  • Despite positive cumulative moneyflow, neartermed momentum for money entering the market is starting to turn down – something that can be seen on the top pane (moneyflow momentum). Such occurrences can lead into interim corrections as you will see via my notations and arrows on the chart.
  • There is a slight rounded look to the market since the mid- June peak. The prior lid of 2400 is the neckline for that short termed formation. A break of 2400 could result in a completion of a small rounded top that could see a pullback to 2300 or thereabouts. That’s an area of prior support, and where the 200 day MA lies.
  • Divergences in stochastics, RSI and MACD can lead into market corrections. You can see such occurrences marked on the chart and the frequency of good signals they gave. Although MACD and RSI are currently diverging bearishly – stochastics (the fastest of the momentum indicators on this chart) is not. So, there is a conflict here…

 

All in, there are no panic buttons to be pushed here, but it does look like we may get a pullback of about 5% in the near-term.

4 Comments

  • Hi Keith:
    Hope you enjoyed the few days at the cabin. Should there be 5% pullback near term (August), would you go entirely back into the market, partially back in or wait for the infamous volatility of September-October to deploy cash. I expect you do not have an answer but am interested in your thought process. Thanks.

    Reply
    • Hi Terry–I will maintain some cash – not sure what level but at least 15%–into October no matter what the case–but I do expect to spend a certain amount of my cash upon a neartermed correction on certain stocks we have on our watch list.

      Reply
  • Some TA’s pick a horizontal line at about 2340-2325 for support. Some like yourself have picked 200dma.
    Could you elaborate on how you draw your conclusions.

    Reply
    • Bert–I look at the cluster of support that lies just over 2300–as the other TA’s have noted (2325 seems to be a fair level). If you look in the recent history of this market, the 200 day MA has also acted as support–market has bounced off of that line a few times since early 2016. The 200 day MA lies at around 2300 or so right now, so that adds to the probability that a correction might find some support right around 2300 or just above that level.

      Reply

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