After breaking down to the downside early last week, the S&P500 managed to close the week back in the friendly confines of its recent channel. Since the markets broke down in August, SPX hasn’t closed below 1,120 on a weekly basis, and has only closed 1,200 once. So it’s safe to say that these two levels are the ones to watch. Coming off the 1,075 low last Tuesday, anyone who bought dips the rest of the week was rewarded. Will that trend continue all the way to a test of 1,200? There’s a few things to watch in order to gather some clues.
The VIX hasn’t gone below 35 since September 20th, coincidentally enough that was also the last time SPX closed above 1,200. So the first clue that people who buy dips will continue to be rewarded (at least in the short term) is if the VIX breaks below 35. September 20th was also the last time XLF closed above $12.40. Watch XLF to see if it can find support above $11.50 as an early sign that it might be able to test $12.40 again, which would be supportive of SPX’s chances to test 1,200. Lastly, turning to the Dow Transportation average, September 20th (noticing a trend here) was the last time TRAN closed above 4,450. What was the high of day on TRAN Friday? 4,449. The 4,200-4,300 range will become key if TRAN hopes to stay in position to get back above 4,450.
So as you can gather, September 20th was a big day technically for the markets. What’s interesting though is that VIX, XLF, & TRAN were all able to test the key levels from September 20th, while SPX couldn’t get within 25 points of 1,200. The bullish case here is that VIX, XLF, & TRAN are all giving early signs of being able to break out from recent bases, and might be preceding a potential test of 1,200 in SPX. Watch dips closely, if the market is able to avoid sliding more than 1% intraday, it could be a buying opportunity. Monitor gaps higher closely as well. It’s a bearish sign if the market is unable to sustain early morning gains throughout the day and into the close.
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