S&P 500® Index Technical Formation
The S&P 500 (SPX) closed at 1701.84 on Monday, September 23, extending late last week’s weak trade with a 0.47% decline. It was the weakest close since 1697.60 on Monday, September 16, and eliminated the gain from last Wednesday’s post-FOMC statement advance that established a new all-time high of 1729.86 that afternoon (Figure 1).
Monday’s weakness was surprisingly prevalent despite favorable weekend news. German Chancellor Angela Merkel scored the largest electoral victory in 23 years, Apple reported strong initial iPhone 5s sales, and a six-month high for the HSBC China manufacturing index provided a strong foundation for Monday’s open. However, despite those near-term tailwinds, the unfavorable SPX response suggests investors must pay elevated attention to a potential SPX correction.
As the calendar turns into October, the focus will be on the ISM report for evidence of a continued manufacturing recovery, and, of course, on the monthly payroll report on Friday, October 4. The following week, calendar third quarter earnings season begins. Prior to the release of the two economic reports, both SPX technical formation and the looming September 30 deadline for extending the federal government’s spending authority will be the market’s main catalysts and dictate near-term price action for the SPX.
First, I expect the September 30 federal spending authority deadline will not be resolved until final hours before the deadline, with a small chance for a short duration partial government shutdown targeted at non-essential government services. By comparison, the November 1995 government shutdown lasted four calendar days, and the December 1995 government shutdown lasted 24 days, ending in the new calendar year on January 6, 1996. The larger, more contentious issue surrounding the extension of the federal debt limit will occupy the second half of October, and needs to be resolved by November 1.
Therefore, investors should utilize the near-term technical formation to help guide decisions to protect capital that is currently allocated to risk assets. Monday’s close places the SPX (Figure 2) in a position of vulnerability for a deeper decline toward a critical cyclical support level of 1660 to 1675. Surrounding those levels are the supportive 50- and 100-day moving averages of 1679.15 and 1656.04, respectively. In addition, a critical swing area from early September is also placed between 1656.02 and 1669.51. Bullish forces must reemerge rather quickly this week to negate the bearish momentum of the past few days and neutralize the modest correction potential currently facing the SPX.
I am in the process of formulating my playbook for Q4, to be released in the coming weeks. Similar to my Q2 playbook, the foundation of the Q4 playbook will give a higher priority to the SPX technical formation.
Figure 1 S&P 500 Index (SPX), July 1, 2013 to September 23, 2013
Figure 2 S&P 500 Index (SPX), January 1, 2013 to September 23, 2013