The S&P 500 index hit a high of 2087 on the day and closed at 2077 holding onto the support at 2075 as well as remaining above the 200 DMA. From my view this is a positive for the index as the test enters its sixth day. As seen on the chart below the move back to the July high is now showing the third and most significant test of the reversal off the September low. Technically everything is holding up and the test is a normal process for the move higher as well. The challenge comes with the 2075 level of support. This is the last resistance level broken and thus the first level of support on the test or pullback. If it breaks it will invite more speculation from analyst, traders and pontification on what it all means. That will trigger emotions and the sellers may get a leg up on the buyers as a result of the short term view.
Chart
It is important to understand what potentially lies in front of you and then determine the best and worst case scenario you are willing to accept in light of the current data. Money management is a series of what if’s as the market unfolds moving forward. We are at one of those crossroads where based on our time horizon we have to ask what if the index breaks support and continues lower? Armed with that information we can adjust our stops and manager our risk accordingly.
The next step for me is to look at what sectors are acting or driving the direction since hitting the high on November 3rd. To do this we can simply run a comparison of the ten sectors of the S&P 500 index and determine which sector are leading the downside move as well as which have defended their turf despite the move lower in the index. The first table below is the results of that comparisons for the downside leaders.
Chart
As you can see energy is the downside leader followed by telecom and healthcare. If you look at the same table from the bottom up you will see that financials are the only positive sector left from this move lower. Equally valuable is to note that only four sectors have performed better than the index itself. The nine to one ratio for those selling in conjunction with the index is confirming the increased momentum in the current move lower. This adds to the caution going forward for short term holdings or trades. Below is a scatter chart of the ten sector on the same chart with the S&P 500 index to show clearer which are accelerating and which are decelerating. The charts starts on the top November 3rd forward. Just more data to consider.
Chart
Looking at some other indicators that have reversed course of note is the relative strength (RSI) moving down to 59 with a break below 50 as negative. Money flow has decelerated considerably over the last two week… starting the turn lower prior to the selling in the index and currently at 53 with a move below 50 being negative. Volume is below average on the up days and above average on the down days… also showing the sellers taking the upper hand.
None of this is an indication to sell, but collectively it is showing the weaker internals and momentum for the index currently. That is one big caution sign for me short term. Tomorrow is another day and one we will have to stop and watch and evaluate how this unfolds… a break of the support would give us cause to take some money off the table and manage the rest more aggressively as it relates to stops or exit points. That is for the short term time horizon obviously. The longer term view is more murky as the 2045 level would offer a more realistic warning sign if the index were to move below that support mark. Proceed with caution and take it one day at a time for now.