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Schaeffer on Charts: Some Thoughts on the Pullback

We're hearing an incessant drumbeat from bears

by Bernie Schaeffer 10/28/2009 3:41 PM

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As I write this, the 50-day moving average of the S&P 500 Index (SPX) (currently at 1,050 � see blue line on accompanying chart) has been taken out, perhaps the first significant technical casualty of the pullback from the Oct. 19 closing peak at 1,097. Should we close today below the 50-day, my guess is the already nervous cadre of technicians with dire warnings on the table will win some additional converts.

But as you can see from the chart, the much touted 50-day moving average has been very unreliable as a timing tool over the past couple of years, as there have been numerous penetrations, and most of these have either been meaningless or have been outright fakeouts. In marked contrast, a favorite moving average of ours � the 80-day (see brown line on accompanying chart) � has been a powerful indicator of real support and resistance. The most recent instance in which the 50-day provided a bogus signal while the 80-day was spot-on occurred at the early-July market lows, as the 80-day held as support after the 50-day was taken out with some authority.

The 80-day is currently sitting at 1,019, though it is rising a bit each day. Another 80-day test would be logical from my perspective, as we're seeing some disappointing earnings reactions (particularly on so-called "beats"), and as the incessant drumbeat of bearish pronouncements from both fundamental and technical types spooks some additional players. At current 80-day levels, this would represent an 8% pullback from the intraday peak last week. Should the 80-day be broken, I would expect an additional stand to be taken at the 1,000 mark and then at 990, which would represent a full 10% correction. My expectation is that this is the extent of the downside risk at this juncture, as I would expect bearish sentiment to have mushroomed to a level totally out of line with a normal correction of a 60% rally, and sideline money would begin to support a market that had already taken the bears' best shot. In addition, we would be moving into the seasonally positive November-December period.

Daily chart of SPX since April 2007 with 50-day and 80-day moving averages

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(PR newswire � 11/18/09)

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Schaeffer on Charts: Some Thoughts on the Pullback

We're hearing an incessant drumbeat from bears

by Bernie Schaeffer 10/28/2009 3:41 PM

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