Despite a strong rebound on Friday, the major U.S. indices closed lower again last week. Leading the way down were the small-cap Russell 2000 and blue-chip Dow Jones Industrial Average, which each lost 1.4% for the week.
The week's most important technical event was the S&P 500's ability to once again test and hold major support at 1,821, triggering a rebound Friday. I identified this level in the Jan. 19 Market Outlook as being critical to the market's intermediate-term direction.
As I said last week, this "is where the S&P 500 should stabilize and begin an eventual retest of the May 2015 highs… if the recent decline was just a correction within a healthy bull market. If the market cannot stabilize at this level, it warns equities are in the midst of an emerging bear market."
The only sector of the S&P 500 to post a gain last week was consumer staples, which rose just 0.9%. Financials and utilities were among the weakest sectors, each down 2.2%.
Not surprisingly, Asbury Research's own metric shows the biggest outflows from sector bet-related ETFs over the past one-week, one-month and three-month periods came from financials. This fueled last week's decline and warns of more losses for the sector.
Editor's note: Investing prodigy Jared Levy is also seeing trouble ahead in the financial sector, especially for one major bank. In fact, he just told his Profit Amplifier readers about an opportunity to make a 39% profit by mid-April from an 11% drop in the stock. To learn how to get in on this trade risk free, or simply hear more about Jared's strategy, read this short fact sheet.
US Stocks At Major Decision Point
This week's first chart, which defines key underlying support and overhead resistance levels in the S&P 500, is one that I have reviewed often during the past two months. While I try to use different charts whenever possible to keep the report fresh, this one is simply too important right now to skip.
As I stated earlier, if the current stock market decline is just a normal correction in an otherwise healthy long-term bull market, 1,821 support is where the larger positive trend should resume -- and it should do so by the end of this month.
This level has been tested twice within just the past three weeks and held, so clearly the market recognizes its importance. A sustained breakdown below 1,821 would clear the way for a decline to the next key level at 1,755 to 1,738, which is situated 18% to 19% below the index's all-time high, made in May.
Conversely, a sustained rise above minor overhead resistance at 1,872 would clear the way for a move to the next overhead level at 1,903.
Oil Prices Key To Stock Market Direction
Since late 2015, much of the day-to-day movement in the U.S. stock market has been driven by crude oil prices, which investors view as a barometer of global economic health. Statistically, West Texas Intermediate (WTI) oil prices have had a 0.72 positive correlation to the S&P 500 since October, and that correlation tightened to 0.90 since January.
So, while we are watching the S&P 500's reaction to 1,821 support this week, it is also a good idea to keep a close eye on oil prices.
Over the past two weeks, oil has been testing, and thus far holding, underlying support at $30.81 to $28.10 a barrel, finishing last week at $29.33.
As long as this support holds, I will view it as an indirect indication that 1,821 will continue to hold as support on the S&P 500 as well. Conversely, a sustained decline below $28.10 a barrel would warn that a deeper decline in the S&P 500 is also coming.
Lower Interest Rates Indicate A Nervous Market
In last week's Market Outlook, I pointed out that the yield of the benchmark 10-year Treasury note was closing in on a test of 1.85%, saying the next key level was 1.68%, the January closing low.
The 1.68% level was indeed tested at the end of last week. Yields closed as low as 1.63% on Thursday before recovering to 1.74% on Friday.
As I said last week, the decline in long-term Treasury yields is a direct result of the recent shift in investor assets out of stocks and into safer Treasury securities, which drives their yields lower.
The next key levels are 1.58% and 1.43%, which is the lowest yields have been going back more than 100 years. My work suggests these levels will be tested this quarter. If I'm right, it indirectly suggests that, minor rallies aside, the current stock market decline isn't over yet.
Gold May Be Getting Ahead Of Itself
The SPDR Gold Shares (NYSE: GLD) jumped 5.4% last week, putting it up about 15% since I alerted readers to a potential opportunity in the fund less than two months ago. Although the recent rally suggests an emerging major bullish trend change in the yellow metal, Market Outlook readers who bought in late December should consider taking some profits as bullish sentiment is getting pretty frothy.
The next chart shows that, according to a daily survey of retail futures traders (lower panel), we have reached a bullish extreme that previously coincided with the most important peaks in GLD since 2012.
Considering we were able to get in front of a pretty big price advance during a time when the vast majority of financial asset prices were declining, this may be a good place to lock in some near-term profits while we wait for a decline to potentially buy gold again.
Putting It All Together
The bellwether S&P 500 began this week just above important support at 1,821 after successfully testing it twice during the past three weeks. I continue to view this as an important inflection point from which the next intermediate-term trend -- up or down -- is likely to begin.
My bias slightly favors a deeper decline due in part to my expectation for even lower long-term interest rates. If oil prices drop below $28.10 a barrel, that would also indirectly support more weakness in the stock market.
This article was originally published on ProfitableTrading.com: Key Levels Hold but We're Not in the Clear Yet