Sellers took over the short-term direction of the stock market last week.

The S&P 500 finally closed below its 9-day exponential moving average (EMA). That action kicked off some selling pressure. And the index closed down about 2.2% for the week. 

Of course, the loss was even larger on Friday morning, when the S&P dipped all the way down to 2722. That was 96 points below last Monday’s high. But, buyers stepped up in the last hour on Friday and cut the weekly loss by 20 points.

That last hour buying pressure inspired hope among some of the financial television talking heads over the weekend. Many of them commented that now that the market has pulled back for a week, and now that some of the overbought conditions have been worked off, stocks are ready to press higher once again.

I’m not so sure.

Take a look at this updated 60-minute chart of the S&P 500…

This is a 60-minute chart – which plots data points on the chart at the end of every hour. It’s a short-term look of the stock market. And, patterns on this chart tend to play out within about five to seven trading days.

This chart defines short-term, tradable trends in the market. For example, each time the S&P 500 crosses its 50-period moving average (MA) (the blue line, which is the 50-hour MA since this is a 60-minute chart), the index tends to make an extended move in the direction of the cross.

When we looked at this chart back in late January, we noted that traders would have done quite well by simply buying the S&P 500 when it crossed above the 50-period MA, and then selling that position and going short when the index crossed back below its 50-period MA.

Last week, this chart crossed to the downside. The S&P is now trading decisively below the 50-period moving average line. It looks like the stock market has further to fall.

While it’s possible the index might bounce back up a bit – just to test the 50-period MA as resistance – this chart looks bearish to me.

We just experienced a 10-week long rally phase. We probably need to see more than just a one-week decline in order to balance things out.

Best regards and good trading,

Jeff Clark

Reader Mailbag

Have you been trading the S&P 500? Are you preparing for another rally, or a longer decline?

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