Market Extra: S&P 500’s new mini-uptrend give bears more reason to be nervous, charts suggest

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Bulls might be frustrated and increasingly concerned about how long it is taking the S&P 500 index to recover from last month’s nasty correction. But the popular stock-market index’s movements since then suggest that patience will pay off.

From the perspective of technical analysis, stock charts aren’t flashing a definite sign that the nine-year old bull market has reached its peak. What’s more, recent signals suggest it’s the bears who should be getting more worried.

Don’t miss: Is this bull market really 9 years old?

See also: Why stock-market volatility makes technical analysis more relevant.

The S&P 500 SPX, -0.35%  would have to rally over 3% to get back to its Jan. 26 record close of 2,872.87. Five weeks after the index confirmed its first official correction in 13 months, the rally off the February closing low 2,581.00 might feel like a failed bounce or a bearish divergence to some impatient bulls, especially since the Nasdaq Composite Index has already returned to record territory.

The Nasdaq Composite COMP, -0.72%  rose 0.4% Monday to a second-straight record close, while the S&P 500 rose as much as 0.4% intraday before turning lower to close down 0.1%.

But those bulls should remember a basic tenet of the Dow Theory, which has maintained its relevance among market watchers for over a century: “A trend is assumed to be in effect until it gives definite signals that it has reversed.” (CMT Association).

One of the simplest definitions of a downtrend, as explained by the Dow Theory, is a pattern of lower lows and lower highs. Not only did the S&P 500 not start a new downtrend pattern, it didn’t come close to breaking the long-term trendline that has defined the nine-year uptrend.

FactSet, MarketWatch

In addition, the index fell to test its 200-day simple moving average, which many chart watchers view as a dividing line between longer-term uptrends and downtrends, but bounced sharply to confirm that the moving average was providing strong support.

Perhaps more important than what hasn’t happened is what has occurred since the S&P 500 hit its February low. That could soon prompt the bears to close out their bets, further strengthening the bulls’ case. Specifically, the S&P 500 closed last Friday at 2,786.57, higher than the Feb. 26 close of 2,779.60. That followed a bounce off the March 1 closing of 2,677.67, which was higher than the Feb. 8 close of 2,581.00.

That’s right, a pattern of high highs and higher lows has been established, suggesting a new mini-uptrend to go with the long-term bull trend.

Market-breadth data also suggest bullish momentum has returned. Jonathan Krinsky, chief market technician at MKM Partners, notes that the S&P 500’s cumulative advancers-versus-decliners line has broken out to new highs, which suggests increasing participation among bulls.

Ari Wald, technical analyst at Oppenheimer, points out that recent market strength has had its effect on sentiment, as the 10-day ratio of bearish put options to bullish call options has turned up, after falling in February to one of the most pessimistic levels of the past two years. That should offer “contrarian firepower” for the next leg of the advance, he says.

“By our analysis, the S&P 500’s uptrend is intact…and investors should be buying ahead of what we expect to be a breakout to new highs over the coming weeks,” Wald wrote in a recent note to clients.

Another development that might appear to support the bear case, but could fuel the next leg higher, is heavy trading volume in the SPDR S&P 500 Trust exchange-traded fund SPY, -0.36%  at the February lows.

Many view volume as a validator of a move, since it is a simple measure of participation. But history shows that volume at bottoms is very often heavier than on the recovery, as the panic selling it depicts can reflect capitulation, or nervous investors giving up. The big increase in negative sentiment also suggests the pick-up in volume included new bears.

FactSet, MarketWatch

A key level to watch on the upside, for the potential unwinding of bearish bets, is $280 for the S&P 500 ETF (SPY). Todd Salamone, senior vice president of research at Schaeffer’s Investment Research, said there was heavy activity last week in call options with a $280 strike price, which corresponds with the 2,800 level for the underlying S&P 500 index.

Most of those calls were sold at the open, Salamone said. That means there could be some resistance as the SPY approaches the strike price, but it also means those who sold the calls could start losing money if the SPY goes above the strike, which could help fuel buying to protect against losses.

The SPY rose as much as 0.7% in early trade Tuesday to an intraday high of $280.41, before turning lower, while the S&P 500 reached an intraday high of 2,801.79 before pulling back.

“Despite the overhead resistance, there is sufficient pessimism in the market that, if unwound, can drive equity benchmarks through technical resistance areas as the recovery from the corrective lows continues,” Salamone wrote in a research note.

With the short-term technical outlook favoring more gains for stocks, bulls have more reason to be patient, bears have more reason to worry.

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