The S&P 500 is now hovering around the critical 1222 area. Continued closes below this price will likely send the S&P 500 back into the trading range bounded by 1068 at the low (bottom red line), and 1222 on the high (see chart below).
The single most important thing to watch is the 40 day moving average (red line) and the slope of the line (the slope of the 40 day moving average).
Right now, the 40 day is flat. However, any additional lower closes in the next few days will turn the slope down. This will make the market more vulnerable to a sharp down turn if it happens.
The key issue here is the "technical resiliency" of the market. If the slope of the 40 day moving average turns down this will be a big negative from a technical trading point of view. On the other hand, if the market turns right back up, now, a test of the highs near 1300 would be likely.
The 200 day moving average (not shown) continues to slope down. This is also creating a stopping point for the market on the upside.
The bottom line. This is a time to be very cautious. Currently, the odds favor another test of the low boundary of the current trading range.
So far, there appears to be excellent support in the 1068 area. However, continued returns to this area would be worrisome from a technical point of view.
Original content Bob DeMarco, All American Investor
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