While the analysis of lines drawn on a chart is hardly an exact science, investors often pay close attention when major trendlines are on the verge of being breached. The long-term weekly chart of the S&P 500 is currently showing just one of those instances, as the index has just declined to a rising trendline that extends back to the low of February 2016. That low connects with a low in October 2016 to extend right up to the current price.
What It May Mean
Market technicians interpret this in a couple of different ways. For one, this trendline may be acting as "support," which could help prevent further declines in the price of the index. Aiding this interpretation are other indicators – like the relative strength index (RSI), moving average convergence divergence (MACD) or the stochastics shown on the chart below – which are showing that the S&P 500 is at or near "oversold" levels and could soon be due for a rebound. A much less optimistic interpretation of what's currently happening with the trendline warns of potential catastrophe if the line is fully breached to the downside. Such a breakdown could indicate a much bigger potential sell-off going forward, according to some technical analysts.
Why It Matters
Monday's very indecisive price action has been the rule of late, and it's the type of market movement that frustrates analysts (and investors) to no end. When price was up sharply in the morning, it seemed that a trendline bounce would be a foregone conclusion. As markets sank in the afternoon, though, it now appears that a trendline breakdown may be a more probable scenario. In either event, it will likely take at least a few more weeks of price action to determine with more confidence whether the S&P 500 uptrend continues or if a further breakdown turns into an extended market slide.