Research & Advice

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Mort à la Résistance

Death to the resistance! That’s what happened to the S&P 500 stock index last week. We have been tracking the rally from the Dec. 24 low to determine its sustainability. Due to improving breadth, we had all but ruled out a re-test of those lows. But we still needed to see the S&P 500 break its 200-day moving average of 2,740 points for us to consider the rally to be on firmer footing. We had been bumping our heads on that resistance line, but with such a positive technical backdrop that we speculated any failure would limit a decline to about a 4-percent drop in prices before breaking resistance. Still the possibility existed of a larger decline, but now those probabilities have dissipated.

But we didn’t even have to suffer that one step back of 4 percent before getting off to the races again. Admittedly a drop of 4 percent is painful but, as we said last week, we didn’t sweat it too much because the stock market corrects 5 percent, on average, three and a half times per year. A pullback of such limited magnitude wouldn’t have changed our constructive views of the market.

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