SPX Support & Resistance Levels

We’re fond of saying, “Buy and hold is dead!” It’s our contention-based on our reading of history–that the stock market is much too volatile, much too prone to painful macd histogram drops of hundreds or thousands of points, for any investor to stay married to his or her positions. It’s especially true in retirement planning for people who are within a few years of saying goodbye to the workaday world and living off a pension, Social Security and investment income.

On 3/26/04, some wise guy on Bloomberg TV made the brilliant assertion that someone who invested in stocks in the days immediately after the 9-11 terror attack would be way ahead today. Sure, the DOW and NASDAQ are much better than they appeared when the World Trade Center was smoldering rubble. But all of the gain came in the last year! Anyone holding shares for the past 2-1/2 years would have experienced several stomach-churning reversals, including the recent correction. Who needs that?

We prefer to save ourselves from ulcers by following the sage advice of legendary investor Bernard Baruch–“I always bought my stocks a little late, and I usually sold them a little early, but I made a fortune in between!”

The challenge, of course, is to determine the best time to buy and sell. Every day we are bombarded by messages exhorting us to “get in” or “get out.” We face a blizzard of business headlines, earnings and economic reports, analyst upgrades and downgrades, media hype, ongoing terror threats, Alan Greenspan addresses and assorted rumors and manipulation by insiders. There is great potential for information overload that leads to investor paralysis, missed opportunities and depressing losses.

The VIX 200-day MA fell further last week and closed at 12.40 Fri. The multi-decade low was 12.29 in mid-Feb ’94 during a 9.7% SPX correction over 60 calendar days from early-Feb to late-Mar. The 9.7% SPX pullback followed the longest period in history, i.e. 3 1/2 years, without over a 9% SPX correction. Currently, SPX is in the second longest period in history without a 9% or more pullback, i.e. over three years.

Last week, VIX continued to stay below the 200-day MA and closed at 11.96 Fri (see chart below). Also, the price chart shows SPX continued to trade in the upper half of the daily Bollinger Band, i.e. above the 20-day MA, currently at 1,278 1/2. A break below the 20-day MA may cause SPX to fall quickly to the lower Bollinger Band, currently at 1,254 1/4. SPX has generally held 1,250 for over three-months, in part, because 1,246 is a multi-year Fibonacci level.

The NYSE Oscillator (NYMO below) closed below negative 11, which suggests the first pullback will be limited, perhaps to around 1,260. SPX may then make another attempt to break 1,300, although 1,275, which has been a key level, and the 20 & 50 day MAs, which are rising toward 1,280, may turn back another rally attempt. It’s uncertain how swiftly or slowly the potential pullback will take place. However, the bulk of the move could be on a few big down days or on a grinding downtrend over a few weeks, although, the week of Mar triple-witching expirations typically have slight upward biases.

There’s a slim possibility that SPX will rise to the five-year high at 1,316 from current levels. However, both fundamental and technical data make it unlikely. More newsletter advisors are suggesting taking profits, the FOMC meeting is Mar 28th, the megaphone, head & shoulders, and rising wedge patterns are bearish, the VIX 200-day MA and SPX to VIX ratio reflect very high market risk, Nasdaq has lagged, SPX was turned away near 1,300, etc. Nonetheless, a breakout, e.g. a short-squeeze, above 1,300, perhaps on a steep fall in oil prices, should be taken into account, particularly if SPX closes above 1,295.

If SPX closes significantly below 1,246, the Jul to Oct congestion area between 1,200 and 1,240 is a major support zone. However, a 9% pullback would send SPX to the Oct lows. The Dow’s MACD created a bearish crossover last week. If an SPX MACD bearish crossover seems inevitable, then selling may accelerate. Currently, the SPX MACD is moving towards a bearish crossover (see below). However, a bullish kiss may cause a powerful bounce. So, SPX’s MACD will be an important indicator to watch next week.

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