On June 15, I wrote that the S&P 500 (SPX) was trading within a descending channel.
It’s a reversal pattern which temporarily contains price action within the boundaries of two parallel trend lines (blue lines on the chart below).
Eventually, prices will break out of the channel.
This will be the first sign that the market has put in a strong enough bottom from which it can sustain a rally.
On June 15, I wrote we should expect the SPX to find support along the lower boundary line of the channel.
This support level came in around 3674 in the index.
The very next day, the market pushed lower to test this trend line.
The trend line worked exactly as it should have, and the market went on to rally almost 7% over the next five trading days.
While this seems like a promising development, I don’t think this market is out of the woods yet.
Let’s look at the updated SPX chart to see what I mean…
As you can see, the reaction off that bottom trend line is almost picture perfect.
It’s encouraging, but there are two significant obstacles the market must overcome before I’ll be confident calling for a long-term bottom.
The first obstacle is the upper line of this descending channel. Right now, it coincides with a price level of about 4020.
The lower line of the channel was able to bounce prices quite strongly… telling me this channel is important to the market.
Therefore, it’s possible this rally will sputter out as it encounters the upper line of the channel.
But, if we can break out of the channel, then the market will have to clear the daily 50-period moving average (MA – red line).
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The 50-period MA is an important intermediate-term trend indicator.
Notice how in April when the selloff picked up steam, the market broke below the 50-period MA and has stayed below it ever since.
Getting back above the 50-period MA will be a strong statement by the bulls.
They’ll practically be shouting from the rooftops that they’re ready to seize back control of this market.
My long-term analysis of the SPX suggests the next bullish wave will carry us to approximately 5300 in the index.
And will likely take place over a year or more once this technical bear market has ended.
With that in mind, I’m more than willing to wait for the market to prove itself before getting aggressive on the long side again.
Happy trading,
Imre Gams
Analyst, Market Minute
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