The S&P 500 has been short-term oversold for most of January with little response to this oversold condition, which, BofAML's Stephen Suttmeier warns, is typically bear market behavior. However, US (and global) equities may be finally responding to tactical oversolds with what we believe is a sell strength relief rally...
Where’s resistance?
In terms of the S&P 500, look for resistance in the 1867-1900 area, which the S&P 500 could exceed today, followed by 1950 and then the chart congestion zone between 1990-2025. Note that if the S&P 500 cannot regain 1900, it would be a textbook top breakdown and retest, but this is the real world where “trend followers” do battle with “mean reverters” and we cannot rule out a throw back into the topping pattern and into the 1950 to 2025 area.
Where’s support?
For those looking short term, yesterday’s low of 1848 is important support for building on an oversold bounce. The undercut of the October 2014 low of 1820 on Wednesday’s move to 1812, establishes 1820-1812 as support. However, many US equity indices already have tops in place (Russell 2000, S&P Midcap 400, and Value Line Arithmetic) and many technical indicators rolled over in advance of price. As such, we see risk for additional new lows. Below 1812 the next level for the S&P 500 is the rising 200-week MA near 1782 with the 38.2% retracement of the 2011-2015 rally at 1730. With a potential year-long distribution top, we are not ruling out 1600-1575 or a retest of the 2013 secular breakout point.
VXV/VIX oversold
The VXV/VIX is oversold, but since July 2015 these signals have led to lower highs in the S&P 500.
We see a similar set up for 2016. The S&P 500 failed to respond to the January 11 buy signal on the VXV/VIX – instead the S&P 500 dropped over 100 points into Wednesday’s intra-day low. It generated another on January 19.
Williams %R coming out of tactical oversold
Similar to the VXV/VIX, oversolds for the Williams %R, a price momentum indicator, have led to rallies to lower S&P 500 highs since mid 2015.
The Williams %R has been pinned at oversold since early January and quick spikes into overbought indicated sellable rallies in December. This is downtrend, correction, and/or bear market behavior.
The drop was too orderly anc complacent to be "the" bottom...
On Wednesday, the S&P 500 probed below the August 2015 and October 2014 lows at 1867 and 1820 on the move down to 1812. This intra-day drop of 3.67% did not trigger an intra-day NYSE ARMS panic reading of 2.0 or more and we have not gotten any closing ARMS above 2.0. This suggests that the decline was orderly and not capitulation. This is unlike the late September and late August lows of 1872-1867, which coincided with panic readings for daily closing ARMS of 2.0 or more.
So here we are, tactically oversold and bouncing... for now.