Market Talk

We’ve been watching for the “dead cross,” and it may have hit — depending upon where you’re looking.

When I mentioned the dead cross this morning as we were getting ready for the Markets Hub, Madeleine said it sounded like something out of “Twilight.” But sadly for the markets, it’s just one more real thing to worry about.

The dead cross is a situation where an index’s 50-day moving average crosses under it’s 200-day moving average, and is considered rather bearish because it indicates that the indexes are falling under their long-term trend.

Our colleague Tomi Kilgore wrote about this the other day (subscription required), and suggests it’s not exactly an iron-clad sign. “There have been nine occasions when the 50-day moving average crossed the 200-day moving average since 1998, and five could be considered false signals,” he wrote. “One might say they seem pretty good at marking contrarian turning points.”

It’s true that the dead cross in an of itself doesn’t mean much. But in concert with other technical markers it can take on more significance. My take on it is that, with what’s going on here, today, it’s just one more indication that the worm is turning.

Taken out to six months on my FactSet chart, the S&P 500’s 50-day moving average is at 1120, the 200-day at 1114. But looking at a one-minute, two-day chart, the 50-day has already crossed under the 200-day (a warning: this technical stuff is a total Alice in Wonderland rabbit hole. I used to think it was rubbish; now I think about dead crosses in my sleep. Kind of scary.)

Scott Raynovich puts all this technical stuff into perspective in his latest Rayno Report: “Technicals should be used to confirm a fundamental view. There has actually been a lot of confirmation of the technical indicators via fundamental data.” Raynovich, incidentally, is short the market, and even adding to his short position.

Either way, the real number to watch out for is 1042.17. That’s the intraday low for the year. This morning’s low was 1042.41. So that level’s holding – barely. Now, 1040 is apparently still a line in the sand. If the bulls can’t hold that, there’s not much beneath it to prevent a big sell-off.

Now, it’s Tuesday. The levels may hold today. But the rest of this week is going to bring some key data, the ISM readings and Friday’s payrolls report come to mind. Any disappointment in those reports, combined with the “fragility” in stocks, could produce some fireworks ahead of this weekend’s fireworks.

S&P 500 currently down 29 at 1045. Watch that 3 p.m. hour. It can bring absolutely anything.

Addendum: I neglected to mention that the 1040-1042 level on the S&P 500 represents the “shoulder” of what’s called a head and shoulders formation on the charts (basically three spikes, the first one is a “shoulder,” the second, higher one is the head, and the third one is another shoulder.) Here’s the take from Kilgore:

This might be significant because, as mentioned in a previous Taking Stock column, the S&P 500 isn’t too far away from confirming a long-term head-and-shoulders reversal pattern. To finalize the pattern, the S&P 500 has to close below what should be strong support at the May and June lows in the 1040 to 1042 range.

If a dead cross is followed shortly by a head-and-shoulders reversal, bulls shouldn’t expect a quick recovery. Instead, they could expect the index to fall to at least the 950 area. In July 2009, it was the rally past resistance at around 950 that created the inverted head-and-shoulders reversal that validated the golden cross that appeared about a month earlier.

Some of that support showed up this afternoon, as the S&P sank as low as 1040.98, and has since bounced off that level. But the visigoths are at the gates, and the guards are looking nervous.