Similar to what happens when you release a severely stretched rubber band, and following deeply oversold readings from just over a week ago, domestic equity markets have recorded a sharp “snap back” rebound. In doing so, the S&P 500 stopped right at resistance last Friday, defined by a declining 20-day moving average and a “retracement” level—2744 was a retracement level of the recent waterfall decline.


While I don’t believe the ingredients were in place at the late January high to signal an end to the secular Bull market, I do believe that the odds favor a further period of digestion for the equity markets—the development of a broad consolidation range as opposed to an immediate return to new highs. Consistent with a trading range environment, I continue to believe the odds favor additional equity market volatility in both directions.

While I believe the odds favor that the recent low was sustainable, I still think that the potential exists for a retest of the February lows. However, I have no way of knowing if a retest of the recent low will be a “full” retest [2581 to 2532 basis the S&P 500 (SPX/2716.26)], a “partial” retest (please refer to chart) or an “undercut” retest.  

Finally, I need to be cognizant of an alternative scenario to my current line of thinking. An acceptable scenario to my “retest sequence” would be that the broad consolidation period lasts for a period of months, not weeks. It doesn’t include another “waterfall” decline and is contained within the levels shown in the second chart.

S&P 500 Chart: 15 minute chart, starting from the February 9th Intraday Low. 
S&P 500 with declining 20-DMA resistance (red line) and rising 200-DMA support (green line). An alternative sequence, to my "resistance scenario," is a broad multi-month consolidation range. This range is depicted by the red rectangle (resistance zone) and green rectangle (Support zone). 

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Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written on 02.20.2018. Chart sources:

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