This week, instead of discussing the TopFinders, I’m reviewing the status of the market, the S&P 500, using standard Midas Support/Resistance curves and one other corroborating indicator.  The Midas curves are robust, easy to interpret, and are applicable to any market condition.

Definitions of Timeframes

I define short term to be the timeframe that is comfortably viewed on a chart of daily bars, intermediate term is a weekly bars chart, long term is monthly bars and very long term is quarterly bars.  This blog entry will be for the short term, with blog posts on the others coming soon.

Current Short Term Status – see chart

In January, price came up against the primary resistance curve that was launched from the 2007 high on the monthly bars chart, consolidated there, then on Jan. 21st, price fell sharply, breaking below the closest-in support curve (dotted green).  This means the previous uptrend has ended.  Then, price went on to break through the next support curve while at the same time remaining below the new resistance curve (the upper red one).  On Feb. 5th there was a minor price pullback, a local high, which didn’t get up to the primary resistance curve.  This behavior – breaking supports while holding below resistance – defines a downtrend.  So, on this short term timeframe, the S&P 500 is in a downtrend.

The Bouncing Hammer

Yesterday, price fell sharply during the day, then reversed all of its loss, closing slightly above its open, forming the classic Hammer candle.  During the decline in the first half of the day, it seemed like there was no bottom in sight, and the sudden reversal came as a surprise to most observers.  Yet, look at what happened on this chart.  Price did not mysteriously stop falling in the middle of nowhere.  The reversal came at the major support curve launched from the correction low of early last July.  The market has, at least temporarily, found support there.

What’s Coming Next?

A Hammer candle in a downtrend often indicates at least a temporary bottom.  Furthermore, the bounce up we had during yesterday from this major support curve both confirms the strength of this support level, and is consistent with some upward motion at least for the next few days.

Now, look at the upper pane, an oscillator commonly known as the Money Flow Index (MFI), which is actually a misnomer.  In reality, this oscillator is the volume weighted version of the RSI, a very appropriate oscillator to use on these Midas charts since the Midas curves are volume weighted and the charting is cumulative volume based instead of time based.  The MFI is now significantly oversold; the last time it was this strongly oversold was at the March 6th bottom last year.  The last time the MFI was this oversold during a downtrend was on October 10, 2008, in the midst of the great crash, after which price bounced up for two days, and then the crash resumed.  So, this oversold condition also supports a bounce up in price from where we are now, at least temporarily.

As long as an up move from here does not go above the primary resistance curve, the upper red one, the downtrend on this timeframe is still in effect.  If it does break above that curve, I’d say we’re in a consolidation, and if it goes further up and breaks the January high, then we would be in a new uptrend.

But, if price definitively breaks below yesterday’s low, that would indicate that the current downtrend is very strong, and likely to go much lower.

Laddered below yesterday’s low are four other support levels; one is a traditional horizontal line defined by the early August high and the early October low, and the others are three more Midas support curves, the lowest of which is the primary support curve launched from the 3/6/09 low, and the other two are curves which have provided significant support already.  Assuming the current downtrend on this timeframe continues, you should watch for support at these levels, and thereby not be surprised when it happens.

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