Monday, February 22, 2010

Key Point in the Rally

From the middle of January the S&P 500 corrected 8%, and has since rallied off the February 8th bottom to the tune of 5.25%. There were some very nice technical features regarding the recent low including a higher low above the last correction at the end of October, and strong support from the 200-day exponential moving average. These are both bullish signs. Now could be the next important stage for the rally as the S&P 500 has gained back 61.8% of the pullback from the high of 1,150. The analysis I am referring to is called the Fibonacci Retracement which is used by technical analysts to find support or resistance in price movement. The rule states that during a trend continuation an index will gain back a large portion, the upper limit being 61.8%, of a decline during a downtrend before continuing to the downside (the reverse is also true during increases in price). We have now hit that level.

Below is a year to date chart of the S&P 500. Using the January 19th high of 1,150 and the February 8th low of 1,044, today’s closing price of 1,108 is just a shade below the 61.8% retracement level of 1,110. If the market finds resistance at this level and once again resumes the decline we will be watching for a sizeable correction to occur. However, if the market breaks above this theoretical resistance level we would call the current fall a pullback in a bull market and anticipate a continuation of the year long rise in prices. This is one tool out of hundreds that we regularly monitor at Pinnacle which has at this moment caught our attention. We will be watching closely to see how stocks react at this key level.