For individual and pro investors alike, perhaps one question is more vexing than any other. That is, has the stock market made its highs for the year?
The issue has become more pressing in recent days as interest rates continue to creep higher. Of course, higher rates signal a better economy, which in turn is an environment that should be good for stocks.
Therefore the argument for a sell-off seems just as compelling as the argument for a further advance. It's in circumstances such as these that pros such as Jim Cramer turn to the charts for insights.
The following analysis was provided by Dan Fitzpatrick, a Cramer colleague at RealMoney.com.
Looking at the daily chart of the S&P 500, Fitzpatrick sees trouble in the uptrending resistance line that's defined the top of the S&P's trading range ever since the recent rally began last November.
For six months, the S&P made a series of higher highs that kept testing this ceiling. Meanwhile, for the first half of the year, the 50-day moving average acted as a bottom—from January through June, every time the S&P pulled back, that 50-day moving average would provide a floor of support.
However, the pattern broke down on Thursday, June 20th, when the S&P slipped below support —this was the first time in 2013 that the benchmark index actually made a lower low.
In technical analysis lower lows are bearish.
Also, as the S&P 500 again advanced, it then began to make lower highs – coming nowhere near the former ceiling. That too is bearish.
If the S&P can't keep touching, or at least coming close to that resistance line on each rally it tells technicians such as Fitzpatrick that the uptrend might well be over.
On top of that the moving average convergence-divergence indicator or MACD made a bearish crossover.
All told, those patterns bode poorly for bulls.
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Cramer is a fundamental investor and he believes the fortunes of the stock market are currently tethered to interest rates. As they creep higher, he fears the stock market may be challenged.
Chart patterns seem to suggest that he's right.
When compared to charts of an ETF that tracks Treasurys, Fitzpatrick noted that yields soared through a ceiling that had been holding them back, while at the same time the S&P 500 broke down through the floor of support that had been holding it up.
Again, another bearish sign.
However, Cramer noted that if interest rates come back down a tad, which he thinks is possible, then much of the chart patterns will come undone.
And if the current patterns come undone, then the S&P could go higher.
"Therefore, I am not yet ready to write off any further advances. However, I recognize that if interest rates jump from these levels, then the glass won't just be half empty, it could be spilling all over the floor."
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