S&P 500 Index: Close Below 2,028 Would Be Bearish Signal, Says BAML

It looks like the S&P 500 Index’s daily momentum may be grinding to a halt as it’s staying well below 2,085. Market breadth also appears to be waning, according to Bank of America Merrill Lynch analysts. Volatility has also been a serious drag on the S&P 500 Index, perhaps causing deja vu for those who remember the market’s action in 2011.

S&P 500 Index’s channel support set at 2,028

Analysts Stephen Suttmeier and Jue Xiong said in their March 24 Chart Talk report titled “Late-Mar vs. early-Nov déjà vu charts” that it looks like the S&P is stalling below 2,085 on the back of slowing price action momentum and waning market breadth. The index rallied on Thursday to close just under 2,035 and continues to edge higher today, and they’ve set the channel support level at 2,028 based on the daily Williams %R, which they say is moving out of overbought territory.

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As of this writing, the S&P 500 Index is up 0.06% at 2,037.24.

They expect the near-term S&P 500 peak to be confirmed soon, just as it was in early November, and they warn that a close below 2,028 would be a bearish signal. As a result, they said investors will likely start focusing the 200- and 100-day moving averages, which sit at around 2,017 and 1,997, respectively. They add that these numbers are beating the chart support levels at 1,969 to 1,947 and that if this channel holds, they see a resistance at Tuesday’s high of 2,056.60 and the double bottom count of 2,085. They also note the channel resistance level at 2,100.

Volatility pushes into oversold territory

The BAML team noted that the S&P 500 Index’s daily moving average convergence divergence (MACD) has been pushed into oversold territory about where it was in 2011. They also said that current levels hover at around the range of overbought territory between 1998 and 2000. Further, it only took two months for the daily MACD to move from oversold to overbought in both the early part of November and the second half of this month.

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They said the S&P 500 Index’s momentum has swung back from the extreme bearish “is the world falling apart” view to the extreme bullish view of “can we break out to new highs?” Suttmeier and Xiong don’t believe the markets have fully tipped over into either extreme, noting that the S&P 500 Index is still range-bound between 1,800 and 2,100.

Breadth momentum plunges

The BAML team also notes that the NYSE McClellan Oscillator and also the percentage of stocks that remain higher than their 10-day moving averages are tumbling following the formation of “bearish divergences” as price action shows lower indicator tops compared to higher highs for the S&P 500 Index.

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They add that once again, the setup looks similar to what happened in the first part of November when breadth momentum also deteriorated, which then was followed by “an important interim peak in the S&P 500” and some of the other major asset classes, including the Nikkei 225, WTI crude oil prices, U.S. high-yield, and U.S. Treasury yields.

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They suggest that 2011 could repeat “or at least rhyme” as there are so many similarities between what was happening then and what’s happening now.