Trading Corner: A Brighter Technical Picture for Stocks

The year 2009 ended with the S&P 500 at a crucial technical juncture. The positive trading action of the first day of 2010 did much to resolve the uncertainty.

The October 2007 high water mark for the benchmark index was 1576.09. The March 2009 bottom was 666.79. The midpoint of these two levels is 1121.45. In technical analysis terms, this level represents a 50% retracement.

After much struggle, the S&P broke through the 1121.45 level for the first time since September 2008 on December 23. It then spent last week above this mark. That is, until the last hour of trading in 2009, when it fell below the key 1121.45 support level. But with Monday’s near 18-point gain at 1132.99, the S&P gained crucial breathing room.

An analysis of the weekly chart shown is below:

The uptrend line from the March 2009 low currently intersects the chart at approximately 1030. Until the index penetrates this trendline to the downside, the primary market trend points upward. The rising 30-week moving average, now at 1030, is almost identical with the trendline, another indication that the primary trend is higher. In four-stage analysis terms, the S&P is in stage II, the bullish advancing stage.

#-ad_banner-#In addition to the 50% retracement level, the S&P is also contending with the major downtrend line drawn from the October 2007 high. During the trading week of December 28th, it briefly pierced this downtrend line only to retreat below it by week’s end.

So far, the index remains above the 10-week moving average, now at 1094. If the S&P can continue to rise above the 1120 area, the next logical target is the upper channel line near 1200, some 6% above Monday’s close. The weekly relative strength index (RSI), a technical momentum indicator, remains in an uptrend. MACD, a technical indicator that monitors the relationship between two moving averages, has flattened, reflecting the prolonged consolidation of the past two months. Stochastics, an indicator that measures the relationship between a stock’s closing price and its price range over a period of time, remains overbought, but has not so far deteriorated.

As long as the S&P can continue to keep 1121.45 in the rear-view mirror, traders should continue to approach the market from the long side.