Liz Looks at: Resistance

By: Liz Young · December 08, 2022 · Reading Time: 4 minutes

Rockin’ Around the Resistance Tree

The phrase “a good college try” comes to mind when looking at the several times this year the S&P 500 has attempted to break above resistance levels. We can give it an A for effort, but so far, resistance is still winning and the anticipated breakout hasn’t happened.

Resistance levels can be defined as the price points that an asset has had trouble exceeding over a specified period of time. Resistance lines can be drawn on a chart at one of a few different “trend” levels, which I’ll discuss more below. As the index approaches a resistance line, investors tend to get fidgety. Will it hold? Is the rally exhausted?

So far this year, we’ve tested resistance on the S&P twice and failed to break above it. And as I write this, we may be watching the third failure occur.

On the 200th Day of Christmas…

The downward sloping trend line began back in March when we failed to make a new high on the S&P after the dreaded “death cross” (50-day moving average crossed below the 200-day moving average).

Some would say that after a death cross, the 200-day moving average (“200d MA”) becomes the notable resistance line. Not surprisingly, investors far and wide have added the 200d MA to their vernacular.

For the most part, that’s been the line to watch, and the stubborn one we can’t seem to get over. The S&P narrowly beat it for a couple trading days recently, but has since fallen back below. It’s also notable for sentiment and directional trends that the 200-day MA has been downward sloping for the better part of this year.

Do You Sell if I Sell?

Trends are powerful, sentiment is powerful, but fear may have the most power of them all. I’m not talking about FOMO, I’m talking about the fear of being wrong — especially when faced with a solid opposing argument.

After another failed attempt at breaking above resistance levels in August, the downward trend line connecting lower highs was in place and nearly impossible to unsee. For that reason, as we approached both the 200d MA and the resistance line in the chart below, sentiment shifted. Those who rode the most recent rally became skeptical.

There is undoubtedly more going on in the background on the macro front, and markets are still beholden to the data of the day. But these nearly exact touch points on resistance lines are a force to be reckoned with, and they’re holding their own.

I admit I did not call nor ride the most recent rally that began on Oct 12th, and I humbly accept the criticism for that. The reason I didn’t is because it still felt too soon to believe it was durable. Too soon to believe it could overcome another resistance test. Time will tell if that’s the case, but what I will say is that if the S&P fails here and continues to fall…I’ll actually become optimistic.

Here’s one thing that’s not different this time: bottoming is a process. With each failed breakout attempt and each lower high, we’re moving through the process. And I think we’re nearing the end of that process for markets.


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