The daily chart below shows the 200-day moving average in red and an overbought/oversold indicator below the price graph in orange. We can clearly see that the index ran into resistance at the 200-day moving average in recent days. At the same time, we can see that the overbought/oversold indicator reached close to overbought but then rolled over.
This overall picture reflects a failure to break above resistance levels and a loss of price momentum. The net effect is that we may be caught in another down leg now that could take the S&P 500 to oversold conditions near the 1160 low of its range.
That is what the technicals are suggesting could happen. But ahead of the European Union summit, we need to be aware that if something unexpected develops, whether positive or negative, the technical trend won't help much.
For example, the S&P 500 was on its way to decent gains this morning, but comments from European Central Bank President Mario Draghi torpedoed the rally on both sides of the Atlantic. The core concern was an explicit denial that the ECB was prepared to extend bond purchases.
However, if markets see enough promise in the outcome of tomorrow's meeting, there will be in all probability a major rally in stocks. Equally, a failure could have a similar longer-term effect.
Why? We could see our Federal Reserve move to a quantitative-easing stance if the Europeans fail to resolve the debt crisis quickly. Were that to happen, U.S. stocks would be more likely to rally.
(Chart data provided by Thomson Reuters)
