The S&P500 backed off last week, dropping about 1.2% on light volume. Volatility, as measured by the VIX index, stopped falling and leveled off near the lows of the year.
There weren’t many US economic reports released last week. The Labor Market Conditions Index came in with a weak (ie. negative) reading. Factory orders missed expectations, coming in more negative than was already expected. International trade was weaker than expected. And wholesale trade missed, badly. On the positive side, ISM services beat estimates, but only slightly. And initial jobless claims were slightly stronger than expected.
Not surprisingly, the S&P500 followed an expected path last week, by losing momentum and turning down just a bit below these levels where it turned down back in November 2015. By starting to turn down here, the S&P is following a huge topping pattern that started at the end of 2014. Basically, this pattern is a range-bound market, with one final, yet innocent looking peak (this happened in May 2015), followed by sharp drops and sharp recoveries where each drop touches a lower low and each successive recovery touches a lower high.
So far, this is exactly what’s been happening. And this long-term topping pattern is exactly what preceded most every bear market in the last 100 years, with one notable exception being crash in 1987.
Will last week’s downturn kick off the next sharp drop? This isn’t clear yet, but if the 200 day moving average doesn’t hold (somewhere around 2.010 on the S&P), then many technical traders—who are very familiar with long-term topping formations—will look to sell their long positions and begin to go short. This would then put additional downward pressure on the US stock markets, and other non-technical traders and investors would follow by selling.
Keep in mind that the 50 day moving average is still below the 200 day, and the 200 day is still sloping downwards. So most technical traders are still on red alert for any major reversal of the recent bounce because these major long-term signals have not turned bullish.
For all these negative technical warning signs to fail, the S&P would have to embark on another major move upward, well above 2,100. And while not impossible (nothing is) that would be a tall order.