S&P 500 is Now Hitting Resistance

After rallying another 2.9% last week, the S&P has completed a fast and furious bounce in the first three weeks of January. Volume was light, and volatility crept down further. That said, the VIX is still almost twice as high as it was during the complacent summer months in 2018.

Building on the arguments presented here last week, the S&P500 has now bounced so strongly that it’s reclaimed the 50 day moving average. And while it’s still below the 200 day moving average, Friday’s closing level puts it just about at the downtrend line that was created after the dramatic October sell off began. Now this downtrend line should act as overhead resistance to further gains. And the yet to be reached 200 day moving average should act as the strongest and final resistance to further gains (this would be only 40 S&P points above Friday’s close).

All this means that if we’re actually in a new bear market cycle that the S&P must now start to show weakness by turning down in the upcoming weeks. If this happens then, the possibility of retesting the lows from December will grow. Also, if this happens then many more traders and investors will begin to believe that the downtrend line has been confirmed. And this will make the resistance of this downtrend even stronger in future tests, when the S&P approaches the line from underneath.

On the other hand, if this downtrend line does not hold (ie. the S&P 500 closes above it and continues to climb higher) then the bears may admit defeat; they may no longer argue that a new bear market cycle has begun.  And the bull market cycle may resume.

All of this should be resolved in the very short term—only a few days, perhaps a week at most. And certainly not a few months.

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