- Dugald Malcolm

Montreal, Canada.

On the morning of January 22nd I wrote about the possible breakdown of support of the S&P 500. By the close of the market later that afternoon, the breakdown was indeed confirmed. The S&P 500 had crossed an important level of support at 1,115 to close the day at 1,091.76, down 2.21% from the previous trading day's close.

As I had mentioned in the January 22nd blog, this was a breach of no minor support level. The S&P 500 had just penetrated an upward trend line that had been in place since the March lows. The breach of the 1,115 level doubly reinforced the breaking of this trend line, with 1115 representing an area of former resistance turned support after a Christmas breakout (or, more appropriately, fake out) as well as representing the 50 day moving average.

The downward movement did not stop there, however. With another significant push to the downside, the S&P 500 briefly took out support at 1,084 on January 29th, only to manage to close back above it the following day. Despite the minor comeback yesterday and today, make no mistake, the trend continues to be down. If and when the 1,084 level is truly broken, one can expect the 1,030 area to be the next level of possible support.

I have included two technical indicators on the above chart to further demonstrate the legitimacy of the S&P 500's downward movement.

Firstly, I have included the percentage volume oscillator, or PVO, which displays the difference between the short and long term exponential moving average (EMA) of volume. When the indicator is greater than zero, volume is said to be heavy and above average. As indicated on the chart, this recent move down has been accompanied by significantly strong above average volume, thereby buttressing the validity of the bearish price action.

Secondly, the average directional index, or ADX, is another indicator I have included on the chart. It is used to appraise the strength of an existing trend. When the ADX line, shown in black, crosses above 20, it signals that a trend is beginning to form and build muscle. The +/- DI lines, shown in green and red, indicate the direction of the trend. Typically, buy and sell indicators occur when these two lines cross. As seen on the chart, the negative DI line has crossed above the positive DI line and the ADX has recently moved above 20. This means the trend is down and is building in strength.

We might see a retest of the 1,115 level in the coming days and, possibly, though chances are slim, a retest of resistance at 1,130. All the indicators seem to be hinting at the fact that the S&P 500 will continue its descent.

I mentioned the level of 1,030 as our next possible stop should we take out support at 1,084. It is interesting to note that the 200 day moving average is increasingly approaching that level and now rests at just 1.5% below 1,030.