S&P Testing Long-Term Resistance

While most of our actionable trades are based on the daily and weekly chart intervals, we regularly monitor the even longer-term monthly time intervals. While the time frame is too long to base specific short- to intermediate-term trading decisions on it, we can occasionally make notable observations to help keep overall market trends in perspective, because such a long time frame eliminates much of the "noise" apparent on daily and, to a much lesser extent, weekly charts.

Right now, for example, it's worth pointing out the monthly chart of the S&P 500:

S&P 500 -- Monthly Source: TradeStation

Since at least the middle of 2003, notice how perfectly the 20-month simple moving average of the S&P 500 has acted as a long-term trend indicator. Notice how each touch of this moving average, circled in pink, led to a resumption of the dominant trend.

From 2003 through 2007, the dominant trend was obviously "up." Then, in January of 2008, the S&P 500 finally cracked support of its 20-month MA for the first time in nearly five years. At that moment, the 20-month MA became the new resistance level. This is because the basic rule of technical analysis dictates that a prior level of support will become the new resistance level after the support is broken. This was proven to be true in May of 2008, when the index rallied into new resistance of that 20-month MA, only to swiftly move lower after bumping into it. Now, for the first time since then, the benchmark S&P 500 is again testing that pivotal, long-term resistance level.

Even though the 20-month moving average has perfectly acted as support, then resistance, for the past six years, this does not mean you should immediately dump all your long positions and start selling short.

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At the time of publication, Wagner was long DBB.

Deron Wagner is the founder and head trader of Morpheus Trading Group. His daily focus is managing and trading the Morpheus Capital Hedge Fund, which he founded in April of 2004. He also teaches his trading methodology with The Wagner Daily, The MTG Stalk Sheet, and The Wagner Weekly newsletters.