S&P 500 drops to fourth test of the 2010 lows - MarketWatch

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THE TECHNICAL INDICATOR

June 29, 2010, 1:02 p.m. EDT

S&P 500 drops to fourth test of 1,040 support

Focus: Gold, GLD, CTRP, NFLX, BAP, ILMN, MTB, RINO
By Michael Ashbaugh, MarketWatch

Editor's Note: This is a free edition of The Technical Indicator, a daily MarketWatch subscriber newsletter. To get this column, including 100 technical stock picks every month, click here .

CINCINNATI (MarketWatch) - With Tuesday's sharply negative bias, the Standard & Poor's 500 Index has dropped within view of major support at the 1,040 mark.
The downdraft marks its fourth test of this significant floor, and a break lower leaves the U.S. markets vulnerable to potentially meaningful incremental downside.

Before detailing the U.S. markets' wider view, the S&P 500's (MARKET:SPX) hourly chart highlights the past three weeks. With Tuesday's negative start, the index has already plunged to its three week range bottom, touching an intraday low of 1,042.5. On further weakness, its next support holds at the October low of 1,029 and is followed by the 1,007 area, matching a 38% retracement of the rally from the 2009 low.

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Meanwhile, the Dow industrials' (DOW:DJIA) near-term view is similar. In its case, the blue-chip benchmark has thus far bottomed Tuesday around 9,850 matching its three-week range bottom. Looking ahead, additional support holds at the June low of 9,757 and is followed by the November trough, around 9,680.

And the Nasdaq Composite's (NASDAQ:COMP) near-term view is equally challenged. With Tuesday's negative bias, major support holds at 2,140, matching the May and June lows.

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Widening the view to six months adds color. As illustrated, the Nasdaq has broken back below its 200-day moving average after stalling at its 50-day last week. This marks its second failed test of the 50-day, setting the stage for this week's retest of the May low.

Moving to the Dow, its wider view is equally challenged. As illustrated, the blue-chip benchmark stalled last week at its 50-day moving average, and a bearish head-andshoulders top continues to take shape.

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And not surprisingly, the S&P 500's six-month view remains ugly. As illustrated, the index reversed sharply from its 50-day moving average last week, and now faces significant resistance spanning from 1,112 to 1,122. (This area brackets the major moving averages.)

The bigger picture

With Tuesday's sharp downdraft, an already-weak technical backdrop is vulnerable to further damage.

Starting with the Russell 2000 (CONSOLIDATED:IWM) , it's already violated its 200-day moving average in Tuesday's action, placing the index within view of the June low. Its 200-day currently holds at 63.83, and a sustained break below this level signals a primary downtrend.

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Meanwhile, the S&P MidCap 400's (CONSOLIDATED:MDY) six-month view is similar. As illustrated, the MDY's 200-day moving average currently holds at 134.50, and the index has knifed under this area with Tuesday's downdraft.

And returning to the SPDR S&P 500 (CONSOLIDATED:SPY) , it's is also facing an important technical test. As illustrated, major support holds at the 1,040 mark -- matching the February, May and June lows -- and a violation of this level would resolve a bearish head-and-shoulders top. Notably, the current test of S&P 1,040 marks the fourth approach, and major technical levels are normally breached on the third of fourth independent test.

Summing up the backdrop

As detailed above, the S&P 500 is challenging major support at the 1,040 mark. This area matches the 2010 lows, and the neckline of a head-and-shoulders top, a high-reliability bearish formation. Against this backdrop, both small- and mid-caps -- former market leaders -- have already violated their 200-day moving averages, marking the latest in a series of yellow and red flags. And to add insult to injury, the Volatility Index currently holds about 46% under the May peak improving the chances of an eventual breakdown. If this week's downdraft marked a bottom, the VIX would typically be challenging new highs. Collectively, all broad-market trends point lower, and the technicals suggest that a defensive approach remains advisable until the dust settles on a shaky second quarter.

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Tuesday's watch list

The charts below highlight names well positioned technically. These are intended as radar screen names - sectors or stocks positioned to move near term. For the original comments on the stocks below, check out The Technical Indicator Library.

ETF SPDR Gold Trust

Symbol GLD

Mon Close $121.09

Support $119.75

Resistance $123.50

Drilling down further, gold (CONSOLIDATED:GLD) remains a rare source of strength. As illustrated, the GLD initially broke out last month, notching all-time highs driven by a sustained volume increase. At the same time, it's established a three-month uptrend, tracking just above the 50-day moving average. Fundamentally, gold is a traditionally defensive investment -- viewed as an inflation hedge and a store of value -- and its technical backdrop remains bullish with most other sectors breaking down.

Company Ctrip.com International

Symbol CTRP

Mon Close $42.77

Support $40.00

Resistance $47.00

Ctrip.com International (NASDAQ:CTRP) is a China-based travel-services provider positioned to rise. Earlier this month, the shares broke from well-defined resistance, notching all-time highs. By comparison, the ensuing pullback has been shallow, and though still near-term extended, a pullback toward the breakout point would mark an attractive entry.

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Company Netflix, Inc.

Symbol NFLX

Mon Close $117.61

Support $112.50

Resistance $128.00

Initially profiled Feb. 10, Netflix, Inc. (NASDAQ:NFLX) has since returned 89%. Yet despite the run, it's held up well to the recent market downturn. As illustrated, recent weakness has come on lighter volume, with the shares maintaining support around the May peak. Moreover, this month's rally placed the shares at all-time highs, and its path of least resistance points higher barring a violation of first support, around $112.50.

Company Credicorp Ltd.

Symbol BAP

Mon Close $92.86

Support $90.00

Resistance $97.50

Credicorp Ltd. (NYSE:BAP) is a Peru-based bank positioned to rise. Technically speaking, the shares have recently spiked to all-time highs, clearing resistance at the May peak. By comparison, the subsequent pullback has been orderly, placing the shares at an attractive entry near the breakout point, and 7% under the June peak.

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Company Illumina, Inc.

Symbol ILMN

Mon Close $45.06

Support $43.40

Resistance $45.60

Initially profiled May 11, Illumina, Inc. (NASDAQ:ILMN) remains well positioned. As illustrated, it's established a tight three-week trading range, maintaining support around the May peak. Its relative strength is constructive, positioning the shares to further outperform once the broad markets stabilize.

Company M&T Bank Corp.

Symbol MTB

Mon Close $89.24

Support $86.30

Resistance $91.00

M&T Bank Corp. (NYSE:MTB) is a well positioned large-cap name. Earlier this month, the shares knifed to 52-week highs, rising on reports of merger talks with foreign banks. Since then, it's pulled in on lighter volume, placing the shares at an attractive entry near the 50-day moving average, and the April/May peaks.

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Company Rino International

Symbol RINO

Mon Close $13.77

Support $12.80

Resistance $15.50

Rino International (NASDAQ:RINO) is a China-based name that provides pollution-mitigation services -- the company helps factories operate more cleanly. Though clearly beaten-down, the shares have recently cleared a three-month downtrend, also sustaining a break atop the 20-day moving average. Both events signal a potential trend shift, and the risk/reward can be favorable from current levels with a stop at the mid -June low, around $12.80.
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