The Ugliest Charts in 2 1/2 Years

by Serge Berger | August 4, 2011 2:00 am

 Serge Berger is the head trader and investment strategist for The Steady Trader[1]. Sign up for his free weekly newsletter[2].

After seven consecutive down days, the S&P 500 finally managed to close in the green yesterday, as did all the majorU.S.equity indices. After stopping some of the bulls out at the 1,240 – 1,250 levels in the first 90 minutes of the day, the bulls took strong control of the ball and raced higher, closing at the highs of the day. 

One day certainly does not make a trend, and while most charts still look very weak, at least the majorU.S.equity indices and S&P 500 sector charts left long tails below their daily candles yesterday. 

The daily chart of the S&P 500 dating back to December 2010 has many things going on. As I’ve been discussing in recent days, the head-and-shoulders (gray circles) formation with its neck line at 1,270 (blue line) is working in full force, and the horizontal support (yellow line) at 1,250 marks the March lows. This is also where we bounced from yesterday.      

SPX Daily Chart

I often show this weekly chart of the S&P 500 dating back to late 2008. The chart is that important, however, so it is more than worth always having in front of us. Yesterday’s lows coincided with the two-and-a-half year uptrend in the index and, as such, this is a logical level for some sort of relief rally. 

SPX Weekly Chart

What is important to keep in mind regardless of the near-term rally possibility that I’ve made very clear in recent weeks, is that the charts now are broken more than they have been at any point over the past two-and-a-half years. Just look at the weekly chart of the Industrial Select Sector SPDR (NYSE:XLI[3]) looking back to late 2008, and note that the sector has now fallen out of the uptrend. 

XLI Chart

Yesterday’s leadership came from the tech sector, which continues to be the healthiest of the S&P sectors. I continue to look for leadership in tech for any follow-through rally. Speaking of follow-through, yesterday’s long candles on the major stock indices; charts are only half as bullish as if they would be once a confirmation rally has occurred. 

Yesterday, I said that given how much stocks had sold off, the S&P 500 would be hard pressed to push much above 1,320 in a potential relief rally. I remain of the same opinion today, and will evaluate along the way as always.

One last thing: A close below yesterday’s lows (if and when it occurs) will clearly be bearish.

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