S&P 500 Charts at a Critical Crossroads
A breakout at this point could signal a substantial, true rally -- but a failure could yank the rug out from underneath the markets.

Will the third time be the charm? That’s the question on everybody’s mind as the S&P 500 Index launches its latest assault on the critical 1,225 level, after having failed at that level in both late August and mid-September. The index rose into breakout territory briefly on Tuesday afternoon when news hit the wires that France and Germany were nearing an agreement to strengthen the region’s rescue fund. True to form, the S&P pulled back in the final half-hour and finished exactly at the point sure to generate the maximum investor confusion: 1,225.17.

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A sustained move above this resistance line also signals a breakout from the 50% retracement from the July high to the October closing low, and it probably will open the door for the index to climb to the 200-day moving average near 1,275 — a rally of about 4%.

Given that we’re about to enter the traditionally bullish November-December period, a breakout here could well signal that the market is on track to test its 52-week high of 1,370. Conversely, the last two failures at 1,225 preceded quick 6%-plus declines, meaning there could be sizable room on the downside if the S&P experiences another shortfall at this level.

Clearly, there’s a lot on the line in the next few days. Investors should therefore keep a close eye on a number of charts that might hold the key to the market’s next move.

At Tuesday’s close, a number of exchange-traded funds with above-average sensitivity to economic sentiment were trading just short of their 50-day moving averages. If these follow the S&P and other major indices above their 50-day MAs, investors have another signal that the coast is clear to go long. On the other hand, a failure of these ETFs to confirm a breakout in the S&P could indicate that this latest rally is just another head fake.

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