Stock Rally Faces Major Challenge at S&P 500’s 200-Day Moving Average

Shares have bounced back from their mid-June lows but have faced stiff resistance at a key moving average for the S&P 500 – chart watchers say failing to overcome it could lead to a significant short-term return of recent gains, underlining notions of the summer rally is a bear-market bounce.

The S&P 500 SPX,
ended Tuesday at its highest since April 21, pushing it up 17% from its low of June 16. But it was reversed during the session after hitting an intraday high at 4,325.78, less than a point below the 200-day moving average, which then stood at 4,326.18.

“The index hit its slightly declining 200-day average to the cent yesterday and the machines shut down their buy and hit the sell button. As we mentioned, there is a cluster of resistance that started at the 200 days and rose to 4,367, which is a 61.8% pullback from the bear market,” said Mark Arbeter, president of Arbeter Investments.

The 200-day moving average is widely followed, making it a natural level of resistance and an area well suited to serve as a battleground given the speed and magnitude of the market’s rise from the June lows. A close above the 200-day moving average would be seen as a change in the market’s long-term trend. The average stands at 4,324.51 on Wednesday, according to FactSet.

Shares came under pressure early in the afternoon, with the S&P 500 falling 0.7% at 4,274, while the Dow Jones Industrial Average DJIA,
fell about 170 points, or 0.5%, and the Nasdaq Composite COMP,
lost 1.3%.

Analysts said that with the S&P 500 still in a downtrend, the market remains vulnerable to a short-term pullback. The sharp rebound from the mid-June lows has left the market significantly overbought on short-term indicators.

Bear market trendline resistance comes in at 4,340, with the 250-day moving average at 4,351, Arbeter said in a note.

The 200-day test, meanwhile, brings back some poignant memories for experienced investors.

“Must I remind you market historians that the ‘500’ failed on its 200 days in November 2000 and May 2008, both of which were the last breaths of
the bulls before the real downside started,” Arbeter wrote. “We don’t think this is another period like that, but you should always keep an open mind.”

Technical analyst Andrew Adams said in a note to Saut Strategy that the longer-term S&P 500 approach to the downtrend, drawn from the January and March highs, guarantees an early pullback attempt. In addition, that retracement could be “pretty sharp” as the “melting” market over the past few weeks hasn’t led to much chart support.

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The 200 days, meanwhile, can “act as a resistance on its own, and it triggered a reversal yesterday. However, I wouldn’t be surprised to see one or two up there just to suck up the last stragglers before they retreat,” Adams wrote.

In the event of a pullback, the area around 4,100-4,150 is the index’s first significant level of support, he wrote, while failing to hold it could lead to a rapid pullback to the “critical 3900-3950 zone.”

“To reiterate, the bull case for the bigger picture wants any dips to stay above 3910-3945. It can get scary down there again,” he said.

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