S&P 500 approaches tipping point

The S&P 500 index broke downwards from its recent pennant, counter to normal bullish expectations, and is testing medium-term support at 1200. Failure of support would test primary support at 1100. Respect of support is less likely, but would suggest a rally to 1300. A 21-day Twiggs Money Flow cross below the zero line would indicate rising selling pressure.

S&P 500 Index

The weekly chart better illustrates the breakout above 1200 followed by several tests of the new support level. Respect of the zero line by 63-day Twiggs Momentum would be a strong bear signal, warning of continuation of the primary down-trend — as would failure of support at 1200.

S&P 500 Index Weekly Chart

* Target calculation: 1100 – ( 1300 – 1100 ) = 900

Comparing to the 2008 weekly chart, there was a similar break below 1400 in January followed by several months of indecision before a false recovery above 1400 in May. Reversal below 1400 precipitated a major sell-off, with the index falling 50% over the next 9 months. If we look (above) at the current chart, there was a similar fall below 1250, several months of indecision before “recovery” above 1200/1250. Reversal below 1200 would provide a similar bear warning to 2008 — as would a 63-day Twiggs Momentum peak below zero.

S&P 500 Index 2008 Weekly Chart

There is no guarantee that stocks will follow the same path as in 2008, but reversal below 1200 would greatly increase the probability of another primary decline — with a target of 900*.