S&P 500 Index Trading Outlook (3-5 Days): Bearish
I am expecting a reversal of trend for the S&P 500 Index INDEXSP: .INX which might start Friday, or early next week.
Market breadth should be peaking today.
S&P 500 Index Technical Analysis
The uptrend has not followed through as robustly as I thought possible last week.
Market breadth is starting to wane, and could start to turn down in the next few days. Stock indices like SPX have largely stalled out near former highs. While a push to minor new highs was thought possible into late October, the risk/reward is poor for new longs here, and Defensive positioning continue to be recommended. Upside resistance lies near 3014 and then 3027-45, while downside support is found at 2975-82 and thought to be important.
Any break of support would likely usher in the first selloff since mid-September. While Technology has held up in absolute terms, the relative charts have not and have turned down relatively. So one should look to sell into any further Tech gain into early next week and should respect an S&P move down under 2975.
Broad Stock Market News / Analysis
The U.S. stock market still has not shown much sign of exhaustion, but has grinded higher with prices slowly but surely moving up.
That said, it has come with definite trepidation given former highs from July and September being challenged, not just with US Equity indices, but also many sectors, with European markets also showing evidence of reaching resistance near former highs.
Overall, most of the cycles related to late April and July are all pointed to late October for some kind of turn and given the rally in October, it’s thought to be a peak. Defensive sectors have outperformed, not just for the last week, but the 1, 3 and 6 month basis, despite some Technology strength to hold up stocks in the last month, largely out of the large-cap Value space like Apple, while Semis have also held up, albeit in a shaky fashion. The fact that Equal-weighted Tech has turned down sharply to new monthly lows relative to the SPX is a minor concern here, as its thought that the broader space should be vulnerable in the weeks ahead. For now, while most S&P targets are up near 3027-45, the price action in the last week has been more consolidation than any real rally, just as this key time zone for trend change is approaching. Can markets get there? Potentially. But the risk/reward is turning sub-optimal to initiate new trading longs within most sectors, particularly Tech.
Specific to mention is that market breadth has shown signs of exhaustion after having pushed back to new highs that likely should bring about a downturn in Advance/Decline in the weeks ahead. Historically, this has been bearish for stocks, as this happened right at the peak in late April and also July. While the extent of the selloff was largely benign, and uneventful, another such period looks to be directly ahead of us, which could produce a negative effect near-term for stocks.
Overall, we’ll exhibit the necessary caution until we are through this period, and advise to be diversified, more defensive, and tactical. If in fact stocks break out across the board on most sectors and indices with strong volume and breadth, i’ll certainly pay attention. For now, the easy trade is to sell gains, buy implied volatility, and see what the market has in store. But pressing gains right as breadth is drying up (Negative breadth yesterday) while former highs are being challenged during a key time for cyclical trend change is flat-out unappealing. More to follow, but the charts and analysis below will attempt to shed some additional light, for now.
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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.