S&P 500 Short-Term Trading Outlook (2-3 Days): Bearish
With two back to back failures, the S&P 500 (INDEXSP:.INX) is looking to extend its pullback toward the 2600 area that marked last Friday’s lows.
This backing and filling process could last into next week before the decline / pullback is complete. As this plays out, we’ll better understand the extent the damage (or lack thereof). “Santa” seasonality should hold off any correction for now.
Movement back over 2650 on a closing basis would likely postpone additional weakness. The trading parameters are set 2600 to 2650 – watch for a break.
S&P 500 Chart
ACTION PLAN: Buying Energy and Pharmaceuticals. Holding off on buying Technology until end of week. Taking short-term profits in Industrials and Financials, but looking to buy weakness on deeper pullbacks.
No real change in thinking given the reversal last week which is now playing out in formerly extended sectors like Industrials and Financials. This should present a notable headwind, given that XLI and XLF both rallied between 5-7% for 4-5 days in late November, and are now simply consolidating gains. These sectors helped to stem the early goings of the decline in technology last week with their run-up. But they are stretched and now beginning to dip a bit here… this is all happening while the decline in Technology has continued.
This “threesome” comprises almost half of the S&P 500 at 49% and makes it understandable why stocks are stalling out after this recent run-up in late November.
Seasonality: While meaningful pullbacks in December might be tough to come by, the first part of the month is historically weak before the Santa rally gets underway. And this time looks no different. Market breadth weighed in at just less than 2/1 negative yesterday, but volume has been heavily into Down vs Up stocks of late. This produced an ARMS index reading of 1.54. (High, yet other signs of capitulation aren’t quite in place just yet).
At present, it still looks like a few days of weakness lie ahead, so it’s important to be selective, and not look to buy into this weakness too soon, December or not.
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.