The market’s tumble below the widely watched 50-day moving average has put bulls on alert for a steeper pullback, but some technicians aren’t so quick to turn bearish after so many false breakdowns in the past.
Over the past 13 months, previous forays below that technical indicator, which many chart watchers and traders use as a guide to the intermediate-term trend, has quickly been followed by a quick rebound higher.
The S&P 500 closed Friday at 1790.29, or 1.3% below the 50-day moving average line, which extends early Monday to 1812.97. That was the first close below the line since Oct. 9.
The 50-day moving average is “on everyone’s radar screen,” said Frank Cappelleri, a sales trader at brokerage firm Instinet. But he said it’s still too soon to suggest a much bigger correction is coming.
S&P 500 and its 50-day moving average FactSet “I’m not ready to make that call,” Mr. Cappelleri said. “If you looked at any of these indicators as a reason to get out of the market over the past 14 months, you would have been wrong. I’m giving the market the benefit of the doubt.”
The S&P 500′s previous breaks below the 50-day moving average in December 2012, and April, June, August and October of 2013, all bottomed within a week, and in some cases on the same day.
The lowest close below the 50-day moving average during that time was 2.7% on June 24, after a three-day run below the indicator. The market suddenly reversed course without warning, with the S&P 500 rising in 12 of the next 14 sessions, rallying 7% during that stretch.
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The next potential support level is around 1775, Mr. Cappelleri said, which is where a rising pivot line currently extends. That line had acted as resistance from mid-May 2013 through mid October, and then as support since ever since.
A break of that level, without a quick turn back higher, might send up a red flag for bulls, he said. Chart levels to watch below that include the November low of 1746, followed by the September high at 1730.
Meanwhile, resistance starts at around 1813 to 1815, which coincides with the 50-day moving average and the Jan. 13 low, Mr. Cappelleri said.
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