Tuesday, November 27th
S&P 500 Testing Major Support At 1,402 to 1,370

In Monday's Keys To This Week, we said:

This Week, a near term rally is likely in the US stock market from at or near its current level, but this rally should eventually lead into a larger and deeper decline that could stretch into early 2008.  On the plus side, multi-year extremes in investor sentiment, technically oversold conditions and recently-met initial downside targets in the FTSE 100, DAX and Nikkei 225 Indexes, all while several US indexes are testing important underlying support levels, support the likelihood of a near term rally. 

In the broad market S&P 500 (SPX), and as highlighted on the chart below, this support is located at 1,402 to 1,370 this week and represents the (green) March 2003 cyclical uptrend line and the August 16th benchmark low.  Current extremes in investor sentiment and technically overbought conditions typically precede near term rallies - if a rally is to take place, this is a probable place for it to begin. Moreover, this support must hold for the current cyclical uptrend that began at the October 2002 lows to remain intact.

However, near term rallies aside, the chart also highlights several potentially bearish characteristics that warn of an eventual larger and deeper decline.  First, the red highlights point out that the SPX failed twice in its attempt to appreciably exceed the 1,535 March 2000 benchmark high, on July 17th and on October 11th.  The pink highlights point out that these failed attempts could evolve into a bearish double top pattern IF the index closes below its August 16th intermediate low at 1,370.  If confirmed, this pattern would target an eventual decline to 1,190 - this would equate to a 15% decline from Monday's closing price of 1,407 and a 24% decline from the October 11th high.

Finally, the blue highlights point out that the 78.6% retracement of the SPX's most recent August 16th to October 11th rally at 1,415 was exceeded on Monday's decline.  According to retracement theory, this indicates that the October 11th decline is directional (bearish), rather than just a countertrend correction within the August 16th advance.  As such, it suggests that any rally that begins from 1,402 to 1,370 support should fail before it exceeds the October 11th and July 17th highs, and should lead into a decline to new lows.  Assuming  that a rally does take place from this support, a potential place for it to fail would be at the index's 200-day moving average (orange highlights), a widely watched major trend proxy that was appreciably broken on the October 11th decline and now becomes key overhead resistance.  The 200-day moving average is currently positioned at 1,484.