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The Tell: Stock-market rally faces key challenge at S&P 500’s 200-day moving average

Stocks have roared back from their mid-June lows but have run into stiff resistance at a key moving average for the S&P 500 — chart watchers say that failure to overcome it could spark a significant near-term giveback of recent gains and underline notions the summer rally is a bear-market bounce.

The S&P 500

ended at its highest since April 21 on Tuesday, leaving it up 17% from its June 16 low. But it was set back during the session after hitting an intraday high at 4,325.78, less than a point shy of its 200-day moving average, which then stood at 4,326.18.

“The index hit its slightly falling 200-day average yesterday to the penny and the machines turned off their buying and hit the sell button. As we said, there is a cluster of resistance which started at the 200-day, and went up to 4,367, which is a 61.8% retrace of the bear market,” said Mark Arbeter, president of Arbeter Investments.

The 200-day moving average is widely tracked, making it a natural resistance level and an area well suited to serve as a battleground given the speed and scope of the market’s rise from the June lows. A close above the 200-day moving average would be viewed as a change in the market’s long-term trend. The average stands at 4,324.51 on Wednesday, according to FactSet.

Stocks were under pressure in early afternoon trade, with the S&P 500 down 0.7% near 4,274, while the Dow Jones Industrial Average

declined around 170 points, or 0.5%, and the Nasdaq Composite

lost 1.3%.

Analysts said that with the S&P 500 still in a downtrend, the market remains vulnerable to a near-term setback. The sharp bounce off the mid-June lows has left the market significantly overbought on near-term indicators.

Bear-market trend line resistance come in at 4,340, with the 250-day average at 4,351, Arbeter said, in a note.

The test of the 200-day, meanwhile, is stirring some poignant memories for veteran investors.

“Need I remind all you market historians that the ‘500’ failed at its 200-day in November 2000 and May 2008, which were both last gasp attempts bythe bulls before the real downside started,” Arbeter wrote. “We do not think this is another one of those periods but one must always keep an open mind.”

Technical analyst Andrew Adams, in a note for Saut Strategy, said the S&P 500’s approach of the longer term downtrend line drawn off the January and March highs favors, but doesn’t guarantee, a pullback attempt soon. Moreover, that retracement could be “fairly sharp” since the market’s “melt up” over the past few weeks hasn’t allowed much support to form on the charts.

Saut Strategy

The 200-day, meanwhile, “can act as resistance by itself, and it did produce somewhat of a reversal yesterday. However, it also wouldn’t surprise me to see a close or two above it just to suck in the last of the stragglers before pulling back,” Adams wrote.

In the event of a pullback, the area around 4,100-4,150 is the first significant support level for the index, he wrote, while failure to hold it could result in a quick drop back toward the “crucially important 3900-3950 zone.”

“To repeat, the bull case for the bigger picture will want to see any dips remain above 3910-3945. Below there, it could get scary once again,” he said.

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