Fibonacci Levels for the S&P E-Mini

The sharp stock market rally to start off the month of September caught many by surprise after the oppressive bearish sentiment that developed in August. This action or the follow-through buying on Thursday has not changed the broad trading range that has been in effect for the past two months. There are some signs of improvement from the market internals that could be an early sign that the trading range will be resolved.

Figure 1

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The September E-mini made a low of 1002.75 on July 6 (point b) that was less than a point below the 38.2% support using the rally from the March 2009 lows. The rally into the early-August highs peaked at 1127.75, falling just short of the 61.8% retracement resistance of the decline from point a to point b, which is at 1131.75. This is still the major level of resistance to watch. The decline from the August highs did violate the 61.8% support of the rally from the July lows (point b to c), but held the 1037 level on three tests. The 78.6% support at 1030 has also held.

As of the close on Thursday September 2, the futures are just below the 1090 level, but there is some significant chart resistance (red line) in the 1100 area. A daily close above this level will put the focus back on the 1125-1130 area. The first test of this area may be met with some selling as the bears will not give up that fast. A strong close above the 1131.75 level would set the stage for a move to the 1162.65 level. This is the 100% extension target using the rally from point b to point c, and measuring up from the lows at point d.

As I have been mentioning for several months, the A/D line did confirm the April highs. The A/D line then made another new high in August, even though the S&P 500 and the NYSE Composite were significantly lower. The A/D line has a good long-term record of leading prices both higher and lower, but the current time lag is longer than we would normally expect. If you want to read more on the A/D, read this recent Trading Lessons article. The A/D line is still in an uptrend from the February lows, line 2, and has now moved through short-term resistance, suggesting that the uptrend in the A/D line has resumed. To keep the uptrend intact, the A/D line needs to hold above the recent lows.

Figure 2

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Though the Dow Jones Industrial Index is less representative of the overall market than the S&P, historically, it has often given some insight to the markets direction by performing better or worse than the broader averages. The recent decline in the Dow has so far held well above 9428, the major 38.2% support going back to the March lows. The Dow was stronger on rally from the July lows as it exceeded the 61.8% retracement resistance of the decline from the April highs and closed above it for several days. This likely reflects the increased investor interest in large cap, dividend-paying stocks as an alternative to bonds. If the recent lows (point c) hold, then there are several Fibonacci targets to watch. The 127.2% retracement extension of the decline from point b to c is at 10,926, with the 161.8% target at 11,187. More interesting are the equality targets (blue lines) as if we get a rally from the recent lows (point c) that is equal to the rally from point a to b, it gives us a target at 11,037 (100%). Psychologically, I would expect that a close back above 11,000 might finally rekindle some interest in stocks by individual investors, who have been largely out of the stock market.

Since we are going to press before the monthly jobs report, we may see a change in the very short-term momentum picture, but as long as the recent lows do hold, the Fibonacci analysis will remain valid. Read further analysis in today's Charts Traders Are Watching feature.