Throughout the market sell-off of the past few months, I’ve been showing key technical levels to help determine if further downside was likely or if the rout was truly over. In late-December, the S&P 500 broke below an important support zone from approximately 2,550 to 2,650 (which formed at the early-2018 lows), which represented a very important technical breakdown.
The post-Christmas market bounce, so far, is simply a re-test of this zone, which is now a resistance. If the market bumps its head here, another wave down should be expected. If the market can close back above this zone in a decisive manner on the weekly chart, however, then it will have negated the December breakdown.
S&P 500 Weekly
The weekly chart shows how two major technical breakdowns occurred in recent months. The current bounce has not resulted in a close back above the 2,550 to 2,650 resistance zone, so the S&P 500 is still in a downtrend.
S&P 500 2015-2019
Why am I worried about further downside? Because the market is still quite overvalued, among other reasons (global debt is up by $75 trillion since 2008 – no big deal!). The chart below of the Shiller PE ratio (cyclically-adjusted PE ratio) shows that the U.S. stock market’s valuation is still in rarefied territory. It’s going to take much more than the decline since early-October to unwind this bubble.
SPX Shiller P/E Ratio
For now, I am watching to see if the S&P 500 can close back above the 2,550 to 2,650 resistance zone on the weekly chart or if it bumps its head and embarks on another leg down.