The first week of 2011 saw the S&P 500 stock market index pop upwards on decent volume. In fact, the market has been in a strong uptrend with over 20 percent gain since last September. But before you run out and start buying with both hands there are a few technical analysis signals you should be aware of.
High Volume and No Advance?
After a strong run-up in price it is quite normal for stocks to churn and process some of those gains. This allows profit-taking and new investors to come on board for the next leg up. However, sometimes more than just a little consolidation is taking place.
William O’Neil, who fathered the CAN SLIM methodology, keeps a close eye when too many high volume down days occur in a row. You can also add in high volume days with very little advance such as a doji or a short-bodied white candlestick.
Since the last week of 2010 was light trading, it makes technical analysis a little bit more difficult. Still, with three high volume down days in the last week, we should keep a very close eye in case a couple more such distribution days occur in the near future. Two more such days would be an early signal to put some income-generating hedges in place.
It is also interesting to note that the On Balance Volume has crossed its 14-day moving average – which some view as an early warning sign to a small correction.
Technical Analysis: Momentum and Trend
So far, momentum and trend are bullish. However, the bull trend has been in effect for four months and some may anticipate a further breather before the next move up. The MACD histogram shows divergence as the month of December declined while S&P 500 prices rose. Contrarian investors wold take the high readings of RSI and Stochastics to suggest the market is in a dangerously overbought position.
Support and Resistance
The S&P 500 index is above its 1229 support level. There is some longer term resistance as it nears 1300. As well, the index has very large hurdle as it approaches the all time highs right around 1500. Twice previously the index failed to beat this level for any length of time.
Cup and Handle
If you look carefully you just might be able to spot a fairly wobbly cup and handle formation in the S&P 500 index from April 2010 until the end of November. The beginning of December had a high volume breakout from the downward handle. This is a bullish pattern.
Fundamental Forces and the 2011 Future?
Of course, this is a purely technical view of the market and is not taking into consideration the plethora of earnings reports to be released along with other data outlining the health of our economy. So any TA should be taken in consideration with the bigger picture.
But for those that follow price and volume charts, the steam on this last trend could be running a bit low. With a couple more high volume distribution days it could be high time to sell some short-term 'in-the-money' covered calls to protect against a downside drop. But as always, the S&P 500 index and the stock market in general enjoy throwing a few curve balls at any analyst who gets overconfident. 2011 is not likely to be any different for technical analysis.
