- Dugald Malcolm, Montreal

Recent market action has resulted in the bear striking a considerable technical blow to the charts of the S&P 500. When I last provided an update in early June, the charts showed the S&P 500 struggling around resistance at the 200 day moving average. Although it managed to sneak just slightly above it for a few trading sessions, there were just not enough trading volume to keep it there. From an intraday high of 1,131.23 on the 21st of June, the S&P 500 shed close to 10% by July 2nd. The severity of the decline, however, was not the biggest problem with this recent move. The most significant problem lies in where the market slide technically took us on the charts.

To begin with, not only has the S&P 500 moved below its 200 day moving average, but so has its 50 day moving average. The result is what is called the Death Cross, a very bearish indicator indeed. The las time we witnessed a Death Cross of the moving averages was at the end of 2007. The next technical dent was made in the breaching of the 1,040 level. Not only does 1,040 represent a previous level of support during 2010 it could also represent a neckline for a Head-and-Shoulders Top formation. I had mentioned in my previous blog in early June that this was a real possibility. This continues to be true as we go into July. We have already seen a break of the neckline of this pattern but have come back above it during the recent rally. To get confirmation that this pattern has in fact completed would be when prices break above and subsequently close 3% higher above the neckline. We will keep a close eye for a close below 1,008, therefore, to validate the bearish pattern.

The rally we have witnessed over this week is of no surprise. The S&P 500 was deeply oversold after two weeks of steady declines. We might see a move back up to test the current downward trendline in the coming days. Whether we can break above it remains doubtful as trading volume in the recent rally has been anemic at best. If, however, it does muster the strength to move above the trendline, the next level to keep an eye on would be between 1,110 and 1,120. This level represents significant resistance of the 200 day moving average as well as the most recent highs put in during June. It looks, however, with all these negative technical indicators, that we might be in store for the S&P 500 to be putting a lower high, thus continuing the bearish decent lower.