Technical Analysis of S&P500 by BofAML

Very Nice Analysis done by BofAML, Must Read for Aspiring TA’s

The technical pattern for S&P 500 and many other US and global equity market indices is sell rallies, according to BofAML’s Stephen Suttmeier, who notes that the market is as overbought now as it was in July.

Last week’s post Fed-Decision price action was a bearish key reversal day (or shooting star in Japanese candlesticks) on the S&P 500.

Given the risk of a bearish trend change, a bearish key reversal day is consistent with the sell rallies pattern.

 

S&P 500 levels for the week & beyond

A sustained loss of the uptrend line from late August at 1966 (rises 5.5 points/session) would increase the risk for a retest of the lows from August 2015 and October 2014 at 1867 and 1820, respectively.

Given measured move and pattern projections we cannot rule out an undercut toward 1785-1750. Initial support comes in at 1911-1903 or at the early September lows. First resistance is 1993-2021, but the major confluence of chart, trendline, and moving average resistance is 2040-2070.

Watch 10-year note yields: risk is SPX follows them lower

US 10-year Treasury Note yields are breaking below the uptrend line from late August and this could be a leading indicator for the S&P 500.

In our view, sustaining the break below the uptrend line on US 10-year note yields from late August at 2.20% would be a risk to the S&P 500 and support the case for a break below its uptrend from late August (see above). The S&P 500 and US 10-year yields have a high positive correlation of 0.40.

Post Fed decision outside days down for Fins & Tech

Discretionary, Staples, Energy, Industrials, Materials, and to a lesser extent, Health Care, formed similar bearish reversals to that of the S&P 500. Higher-yielding Telecom was weak, while Utilities and REITs were stronger. However, both Financials and Technology generated bearish outside down days. Banks, Broker-Dealers, Insurance, and Regional Banks generated these bearish outside days down within Financials. Hardware/ Equipment and Software generated these bearish outside days down within Technology, while the SOX came close to a bearish outside day down.

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And perhaps even more concerning for the ‘recovery bulls, McClellan Oscillator as overbought now as it was in July

Friday’s 1.6% drop in the S&P 500 saw a spike in the daily NYSE ARMS Index to 2.69, which is a near-term panic reading generally associated with an oversold market.

 

However, the daily NYSE McClellan Oscillator was more overbought last week at 2020 on the S&P 500 than it was at 2130 in mid-July. In addition, Friday was only an 80% down day for NYSE stocks, meaning that there were still places to hide. In our view, this suggests “dislocation” rather than “capitulation” and we continue to see the risk of retest / undercut of the August 2015/October 2014 lows of 1867-1820.

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S&P 500 trades a lot like 2011 & 1998 – both had retests

These charts are more about price structure (or behavior) and less about the percentage moves.

S&P 500 Now vs. 2011

The S&P 500 retested/undercut the August 9, 2011 intra-day low on October 4, 2011. The rally off the August 9, 2011 low peaked 16 sessions later on August 31, 2011 prior to the drop into early October. The rally from the August 25 low stalled on September 17, which is also 16 sessions. The price structure in 2015 is eerily similar to that of 2011. Poor September seasonals as well as the weak August-October period also support the case for a retest of the August lows.

S&P 500 Now vs. 1998

The S&P 500 undercut the September 1, 1998 low on October 8, 1998 and confirmed a double bottom in late October 1998. The rally off the September 1, 1998 low peaked 16 sessions later on September 23, 1998 prior to the S&P 500 decline into early October. The rally from August 25 has stalled on September 17, which is also 16 sessions.

S&P 500 Now vs. 2008

We do not believe that the S&P 500 is embarking on a 2008 to 2009 type of bear market, but the price structure for the S&P 500 off the August 25 low is similar to the price action off the January 23, 2008 low. The S&P 500 undercut this low on March 17, 2008.

S&P 500 still not following the “V” reversal pattern

The 17 sessions since the August 25 low are not following the October 2014 “V” bottom pattern. 17 sessions off the October 15, 2014 low saw the S&P 500 up over 11% and at new highs, while the 17 sessions off the August 25 low show the S&P 500 up over 4% but stalling below resistances – two very different patterns.

As highlighted above, the current price structure is similar to 2011, 1998, and 2008, all of which saw retests/undercuts of the lows.

Source: BofAML