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Technical Point to Lower Prices

David Becker
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Stock prices are under pressure as they consolidate in a tight range waiting for the next impetus to move the needle. The technical picture is not pretty and could continue to put pressure on the major bourses in the immediate future.

One of the best gauges of stock moves is viewing the percentage of stocks that are below their 50 day and 200-day moving averages. As of Friday’s close 40% of the S&P 500 stocks were below their 50-day moving averages. In each of the last three instances where more than 50% of stocks moved below their 50-day moving averages, the large cap index declined at least 5%. This index can also be used as an oscillator reflecting both overbought and oversold levels. Historically, when only 35% of stocks were above their 50-day moving average, the S&P 500 reached a temporary bottom and rallied nearly 5%. IN the latest move, on Wednesday on 35% of stocks in the S&P 500 index were above their 50-day moving averages.

The technical picture shows that stocks are forming a bear flag, and could decline further toward a 10% correction. Currently the S&P 500 index is 4% off of its highs and could easily see a continuation given the current technical outlook.

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