"Last week's minor pullback prevented a breakout above resistance near 4,155 by the S&P 500. This preserves the bear market cycle, for now, and increases risk to initial support of ~3,800 before a breakout," Stockton said in a note to clients.
A downturn in the Moving Average Convergence-Divergence, or MACD, indicator for the S&P 500 generated the sell signal, according to Stockton, which reflects a loss of short-term momentum. The decline in momentum comes after the benchmark index closed at 4,154 last week, just one point below its 4,155 resistance level.
The MACD is a trend-following momentum indicator that technical analysts use to show the relationship between two moving averages of a security's price. A signal line is plotted, which can function as a buy and sell signal. Stockton uses MACD to capture momentum and trend across multiple timeframes.
"After a short-term upmove in the VIX, we would look for it to extend lower with 18.45 support having been broken. This is supportive of an eventual breakout by the S&P 500. A new floor for the VIX can be discerned by support at 15.38," Stockton said. The VIX is currently at 16.77. the VIX would have to stay below 18.45 and the S&P 500 would have to notch two consecutive weekly closes above the 4,155 resistance level.