S&P 500 Index Trading Outlook (3-5 Days): Bullish
Strength could very well continue into next Monday, if the bulls remain resilient.
Early weakness yesterday failed to hold and the major stock market indices turned higher by end of day, preventing any breakdown.
The bottom line: Over 3300 is bullish, while under 3300 is bearish.
As long as we remain over 3300, it’s possible that we see a move up to 3340-3350 into early next week. Otherwise we may see a stalling out.
Broad Market Commentary
The first real attempt at selling off proved short-lived indeed yesterday and by end of day, S&P had managed to regain early losses, and then pushed higher again after hours, with sharp gains out of INTC which should cause some early strength out of SOX and the Tech sector Friday morning. Overall, index prices are literally at levels hit this past Monday in S&P, so while the rally feels relentless, we’ve actually made little actual progress.
Importantly, the decline in Crude oil has accelerated, and energy as a sector has fallen further, with the breakdown under trendline support in Crude considered to be important.
Additionally, Interest rates have also snapped key support across the curve, with 2’s 5’s, 10’s and 30’s all violating trendline support from last August. This should put further near-term pressure on yields, and favors sectors like Utilities and REITS. The flattening out in the yield curve also has affected Financials negatively and this also looks to continue in the near-term, so XLF looks likely to hold off in breaking out above its 13-year area of resistance for the time being.
Overall, breadth stalled out and proved to be negative yesterday, despite the late day snapback. More stocks fell than advanced, and Volume was heavier in down issues. Sectors like Materials (given Aluminum, Steel and base metals stocks) have seen real weakness along with Energy, and yesterday also brought about the first decline in sectors like Healthcare which had recently grown a bit overdone.
The Bottom Line: Yields and crude are moving lower sharply while most of Asia has fallen off and deteriorated in recent days given the Virus outbreak and attempts to contain. Technically, my thoughts are this is not unlike what happened last November when indices showed a minor churning and 3 days of losses in US stocks as Asia fell.
The key will continue to be Technology, which at least for Friday, seems poised to still push higher with SOX approaching a key 2000 target while completing Demark exhaustion next week. Stocks like FB and AAPL report earnings at end of month, and this could serve as the next real catalyst given that these 1 Trillion dollar cap companies now are making up more and more of the SPX with the top 5 now accounting for more than 17% of SPX. All in all, despite the snapback, volatility remains firm, China is selling off and Crude and Treasury yields seem to be breaking down, which is a far different environment than last month. Whether equities can hold up through all this is something to wait and see.
Until the S&P 500 Index gets under 3300, trends are bullish. Yet some evidence of fatigue seems to be setting in, given more and more sectors not moving up in a straight line anymore. The next 3-5 days should be insightful in this regard, with cycles honing in on 1/26 for a possible trend change, early next week.
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Author has positions in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.