Analyzing The S&P Extension Chart
Alan Bradley | May 25, 2015 02:21AM ET
There has been considerable conversation recently that the market may be stalling without being overextended which in the past has been a necessary condition for the market to stall out and rollover. The extension chart of the S&P 500 is the truest gauge of when a market is overextended and oddly enough both the bulls and the bears are currently touting this same chart as confirmation of their view.
Taking a look at the extension chart I posted below:
It's easy to see that the S&P starts becoming moderately overextended when it reaches approximately 200 points above its Day 324 EMA line, which represents midterm neutrality (shown with a green line). The market reaches maximum over-extension when it is 225 points above the 324 line.
Over the past two months the S&P has stopped at the pink resistance line shown, well below its normal peaking level. The bulls argue that this is actually a good thing as the market has plenty of room to run, approximately 40 points before it reaches maximum over-extension. The bears claim the same chart as support for their argument that the market is about to take a hard rollover. Their view is that the market has been trying for two months to climb on up to its normal over-extension peak as it has done repeatedly in the past few years but there are simply too many sellers and no longer enough buyers willing to participate.
It may be the case that both sides are right in their view of this chart and the outcome will be determined by which side starts suffering defectors to the opposing camp first.
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