A lot of talk has surfaced over the weakness in the S&P 500 since the start of 2014, which has traders asking: “Is this just a correction in a longer-term bull trend or are we in the beginning stages of a new bear trend?” A bull market is defined by higher lows and higher highs. Looking at a long-term S&P 500 chart an argument could be made that a breach of support from 1640.00 to 1624.75 band technically could negate the higher low structure, thus calling into question the bull trend or suggesting a deeper correction is afoot.
At this point, it is a bit premature to call this pullback anything more than a healthy correction in an underlying bull market. The relative strength index on the bottom of the chart shows that the most recent highs in price correspond with consecutive lower highs in the RSI (i.e., bearish divergence).
The last time the market saw a bearish divergence signal of this magnitude was from late 2010 through the middle of 2011. The result of this signal was roughly a 305-point correction from May to October 2011. Certainly talk of a “market top” flooded the media at that time as well, only to have the S&P rally almost 800 points. So where is the trigger point? At what point on the chart does this correction become a threat of a longer-term trend change?
An argument could be made that a similar correction, like the one seen in early 2011, could occur again without completely derailing the current bull market. Interestingly enough, a break of the current bull trendline corresponds almost exactly with a 38.2% Fibonacci retracement from the October 2011 low. Furthermore, if an ascending trendline is drawn across the ’09 and ’11 lows, the trendline intersects with the previously mentioned 38.2% retracement level at roughly 1553.25 around November 2014. The S&Ps are experiencing a corrective pullback in an underlying bull trend and as long as price remains above 1550.00 throughout 2014, the long-term bull trend will remain unchanged.
Erik began his career as a technical analyst for a Chicago-based research and trading firm. Currently he is a market strategist at RJO Futures and is the author of The Tatje Report. He can be reached at firstname.lastname@example.org.