By Michael Tarsala
The S&P 500 is facing a big technical test in coming weeks that could help determine whether 2013 begins with a bang or a thud.
The 1,420 level is make-or-break for three big reasons.
For starters, it’s marked by the 50-day moving average, in blue, that helped to hold stocks back in late October and yet again in early November. A break back above the 50-day could help to end a series of lower market highs that began in early October and continues today, possibly clearing the way for more upside.
Second, 1,420 marks a very strong volume support area. The long volume-at-price bars in pink and gray to the left of the chart above act as a magnet for stock prices going forward. The longer the bar, the more likely that price area is going to attract future price action.
That big price magnet certainly seems to have worked so far. Stocks are once again back in the 1,400 to 1,420 range, where they reached peaks in March and May, and where they spent a lot of time in August.
Breaking out from those volume areas could prove to be difficult. Yet if it happens, there is very little volume resistance above 1,420, possibly clearing the way to new highs.
The third reason to watch 1,420 is that we’re starting to see a bit of weakening in the relative strength index, or RSI, at this key level. The RSI, seen at the top of the chart, is an oscillator that helps to identify market extremes. Moves above 70 and back below it help to identify overbought levels. Moves below 30 and back above it help to identify oversold levels.
However, RSI can also break down before it reaches overbought extreme. It did so in mid-October, and may be starting to do so again. A break back down below the middle reading of 50 could be a signal that stocks could be set to consolidate for a while or break down near the important 1,420 resistance.
Trading over the next few weeks around the 1,420 area could be telling for overall market demand. A strong volume-fueled move back above 1,420 could say a lot about investors’ desire to hold stocks, despite worries including the fiscal cliff.
A failure to break the critical support, however, could usher in more investor fear and doubt, and possibly set up a move back below the November lows.
The above article comes from Covestor.
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