Another mini-pullback, another buy the dip rally? Monday’s price action felt a lot like more of the same. Although we won’t know until we get confirmation, the setup is in place. Since the April lows, the S&P 500 has formed a nice channel that has seen 3 pullbacks (including the current one). The first mini-pullback was followed by a 93 point rally, while the second lead to a 60 point rally. But we will need new highs for the third pullback to amount to anything.
Back in May, I highlighted 3 price targets to look for on the S&P 500. The first was 1950 (check, we hit 1955), the second was 1980 (check, we hit 1985), and the last was 2032. Should the S&P 500 break to new highs, there is still a chance that the index breaks to the top of the channel for one last hurrah before a long awaited correction.
BUT, in order to rally, we will need to see new highs first. Perhaps Options expiration will assist with that.
If opex doesn’t prove bullish, the bears may get an opening… especially if the S&P 500 fails to see new highs. If this occurs, then I would look for a move back to the 50 day moving average.
S&P 500 Daily Chart
Another ‘tell’ to watch is the Russell 2000 (i.e. small caps). As I wrote about over the weekend, the bulls are redefining risk-on with a greater eye towards large caps (and a quick trigger on small caps). BUT, small caps are always a good barometer of risk tolerance.
Three things to watch here on the Russell 2000:
1) A rally back towards old highs (retest) would likely be enough to propel the S&P 500 to new highs.
2) A failure to achieve new highs on the Russell 2000 could signal another bout of weakness.
3) Any move that takes out the recent lows would spell short-term pain (and perhaps more).
Russell 2000 Daily Chart
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