Breakout Under Threat For The S&P MidCap Index

01/23/07 10:12:43 AM

by Arthur Hill

The S&P MidCap Index broke flag resistance a week ago but quickly met resistance. This breakout is up for a big test. Will it hold?

Security: $MID
Position: Hold

The S&P MidCap Index has been trending higher since July and recently broke flag resistance to keep that uptrend alive. The index surged from late September to early December and then declined from mid-December to mid-January. The decline was slight and formed a falling flag, which is typical for a correction within an uptrend. The index broke falling flag resistance with a surge above 820 and this breakout is bullish.

A strong index should hold its breakout. The index pulled back after the breakout surge and broken resistance turns into support around 810. This breakout produced the bullish signal and a move back below would not be a vote of confidence. In addition to support from broken resistance, the 50-day moving average offers support around 808. A move below 808 would break the 50-day and negate the flag breakout.

FIGURE 1: S&P MIDCAP 400 INDEX, DAILY. Note the January low marks the key support.

Graphic provided by: Telechart 2007.

Even though a failed breakout would be negative, the January low and positive price oscillator held the key to the medium-term uptrend. The index edged above its December high this month and recorded a higher high. The string of higher highs and higher lows since August remains in place, and this is the definition of an uptrend. It would take a move below the January low to break this string and signal an actual trend reversal.

The 5-35 price oscillator has been largely positive since mid-August, and momentum favors the bulls as long as this indicator remains in positive territory. The indicator dipped into negative territory in early January, but rebounded recently. This rebound looks rather feeble and a move back into negative territory would turn momentum bearish. This could be used to confirm a move below the January low in the S&P MidCap Index.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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