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MARKET HITS OVERHEAD RESISTANCE

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The structure that has dominated the price pattern for nearly three years is a rising trend channel, which I have drawn on the S&P 500 chart below. As you can see, the price index has once more encountered the top of that channel, and that resistance will probably prevent any significant price advance until overbought conditions have been allowed to correct.

That is not to say that a major price reversal is imminent. It is certainly possible, but it is also possible that prices will dribble along the bottom of the overhead trend line for several months as happened prior to the summer price lows.

There are two things that argue for a major price decline. First, is the seasonal weakness that the market traditionally experiences in October, and the other is the 4-Year Cycle lows, also expected in October.

$SPX
On the other hand, investor sentiment continues to remain at strongly bearish levels. Note on the Rydex Cash Flow Ratio chart below that the bears have scarcely budged from the bearish side of the three-year range, in spite of the fact that prices have moved steadily higher.

Rydex Cash Flow
Bottom Line: It seems reasonable to expect some weakness over the next several weeks, but I will remain bullish until our mechanical model says otherwise. Even though cyclical and seasonal pressures present problems, I think that sentiment is the trump card. It is hard for me to imagine a major decline beginning when there are so many bears out there.

Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics if conditions change.

Chip Anderson
About the author: is the founder and president of StockCharts.com. He founded the company after working as a Windows developer and corporate consultant at Microsoft from 1987 to 1997. Since 1999, Chip has guided the growth and development of StockCharts.com into a trusted financial enterprise and highly-valued resource in the industry. In this blog, Chip shares his tips and tricks on how to maximize the tools and resources available at StockCharts.com, and provides updates about new features or additions to the site. Learn More
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