The pullback in the markets since the third week of January should not be taken with a great deal of surprise, though it became more serious in February. After lower than expected inflows of capital came into the market after the New Year, March S&P futures were pushed into an overbought position as measured on a daily RSI. After failing to build enough momentum to push through the 1152 level the S&Ps retraced, finding initial support at 1126. Since breaking that level, March S&Ps have been challenging key levels of support which appear to represent an overdue filling in of gaps left over from the fall to 1062.25 in the March contract at the end of November 2009. That was done on Feb. 4.
The contract tested significant support at 1059 on Feb. 4. Downward momentum has found additional strength since the March contract broke its 50-day moving average on Jan. 21 and pierced the 100-day moving average the following week. With volatility levels rebounding, daily RSI is now moving toward oversold range. This should offer the S&P an opportunity to find a foothold in the high 1050 level. A rebound back toward the 1089 and 1096 levels is likely as the bears take profits, allowing equities to formulate a defined range between 1112 and 1062.
Traders looking for further downside in the market may get their opportunity going into March, that is if our support levels that are being tested as we write this hold up. The development of this lower range may offer an opportunity for the S&Ps to stage another breakdown. If the 1052 level fails to hold through early March, look for a downside test of 1035. This would represent a test of the 200-day moving average. The market is likely to take some liberties with this indicator, as a move to this level likely will find significant support around 1026, a significant defense level as value hunters may come in looking for bargains.
Richard Roscelli is a broker at Whitehall Investment Management of Las Vegas. E-mail him at firstname.lastname@example.org