In early February the S&P 500 tested its 150-DMA (black circle red line) and then rallied off that support level. Last week the S&P 500 tested its 200-DMA (black circle on blue line) and bounced off that support level. Today, after Monday’s big rally, the S&P gave up much of those gains, and is again approaching that 200-DMA.
We want to keep a close eye on that 200-DMA because it is an important technical indicator. In bull markets, stocks tend to spend most of their time above the 200-DMA, while during bear markets, they spend most of their time below this line. Stocks seldom stray too far from this line in either direction, and when they do, the further they stray, the faster they tend to revert back to it. Looking at the chart below, we can see that in January, the S&P 500 strayed over 12.6% above the 200-DMA, which was an extreme, and warned us that a correction was overdue.
The question now is, can this 200-DMA hold, and the S&P rally from there?
Key levels to watch:
2587 – the 200-DMA
2535 – bottom of the 2-year uptrend channel
2470 – Key Support
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