The Most Important Chart of the Week.
Individual stocks rise and fall on their own merits, but all stocks are influenced by the price action of the major indices. Because of this, one major index will be watched very closely this week.
The S&P 500, arguably the most important U.S. stock index, reached an all time high on September 2nd. Two weeks later, the large-cap index is testing key support. The S&P 500 is threatening to break below its 50 day moving average, shown in blue.
Why does it matter? Big names like Apple, Amazon, and Microsoft could be affected by the moving average, which could act as a key turning point. Traders are waiting to see if the index can hold above that moving average; if it does, that'll be a signal to start buying.
On the other hand, a break below that key indicator could ignite a fresh round of selling pressure, driving stocks lower.The S&P 500 hasn't closed below its 50 day moving average since April 23rd.
Note that the S&P 500's volume has been higher on down days, shown in red, as opposed to up days in recent weeks, shown in green. This is a phenomenon known as distribution and it's considered bearish for stocks going forward.
The index's MACD, or moving average convergence divergence indicator, flashed a sell signal on September 4th, highlighted in the circle.
The bottom line: Just as a rising tide lifts all ships, a receding tide could leave those ships stranded. If the S&P 500 breaks down, it could take a lot of previously solid names down with it.
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Ed Ponsi is the managing director of Barchetta Capital Management, and is the author of three books for publisher Wiley Finance. A dynamic public speaker, Ed has made appearances around the world, in such diverse locations as Singapore, Dubai, London, and New York. For more information about Ed and his work, click here.