The broader U.S. market indexes all made new 52 week highs in mid-January. Then, in the last two weeks, they have given back all of the ground they gained in the previous 10 weeks—since the first of November.

The markets were certainly due for a pullback from overbought conditions. The pressing question for traders, however, is, “Was this rapid drop just a temporary rebalancing or the first leg of deeper drop?” Let’s take a look at some key technicals to gain some perspective.

Bump or Dip?

First of all, look at the magnitude of the late January drop in the chart below. It cuts through two key support structures: a 10 month trend line and the 50 day moving average.

Now it’s trying to approach the 50 day simple moving average (SMA) from below. The next few days will give us some key input as to whether the 50 will act as resistance. This same technical condition exists for the Dow, Russell 2000 (small caps) and the Mid Cap index. However, the QQQQ (NASDAQ Index) is still far from retracing to its 50 (actually, it’s still more than 2 percent below its 50 day SMA).

This gives us an interesting disconnect: tech is not rebounding as enthusiastically as the broader market.

Foreign Market Performance

What about other markets? Let’s compare the major U.S. indexes along with a few representative international indexes to see if their relative performances give us any clues.

This is a “performance chart” from Stockcharts.com. This type of chart shows how several indexes or stocks are performing in relation to each other.  For our purposes, I wanted to see the relative performance of the selected domestic and foreign indexes since January 14.

As I mentioned earlier, the S&P 500, Dow, Midcap and Russell 2000 have all had similar performance. You can see that they are the top four lines in the chart above and those four indexes all have had the best relative performance during the market pullback and subsequent two day recovery early this week.

Globally, the worst performers have been Latin America, Emerging Markets, Europe, China and, as previously mentioned, the NASDAQ. These are not encouraging signs for the bulls, and the recent tech sector and foreign market relative weakness is significant for me.

Summary

Sustained S&P 500 price action above its 50 day SMA (especially if the QQQQ can climb up there) will provide a case for the intermediate term upside scenario. Based on the technicals and weak geographic participation in our little two day rally, however, that upside scenario is looking like a lower probability outcome right now.

If the S&P 500 cannot sustain this rally with a strong up week including a couple of closes above its 50 day SMA, we’ll most likely look back at this current rebound as a temporary pause in a bigger down move.

Great Trading,
D. R.