S&P 500 Trading Outlook: 4 Factors Likely To Slow Stock Rally

S&P 500 Trading Outlook (3-5 Days): Mildly Bullish

Another 1-2 days of gains look possible this week, but S&P 500 (SPY) is now at bottom part of resistance zone and should hold UNDER 2760.

Overall, the stock market’s 1.5% surge has helped prices reach the bottom of the upside resistance zone at 2745-60 that I feel will be important.

We’ve seen roughly a 400 point S&P 500 rally in about 32 trading days, or 17% from trough to peak. This is roughly 1/2 % a day and a pace that likely is NOT sustainable.

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s&p 500 index stock market rally end chart february

While seeing Financials start to bottom out and turn higher is a very good development for the market on an intermediate-term basis, along with seeing Technology and Industrials continue to show strength, it’s important to separate out the near-term, from the intermediate-term.

This bears some deeper discussion. Specifically, the following 4 factors I view as important and negative from a technical perspective that likely limit this rally from continuing higher throughout the balance of February.

1). The market has shown a more defensive bias recently. While yesterday was bullish in most “risk-on” sectors, we’ve seen Utilities and Staples lead the market over the past 5 trading days.

2). Momentum has begun to slowly wane as a result of last week’s 2-day decline. While yesterday’s breadth was impressive and positive +3/1.. it is highly likely that we see some type of stalling out in both breadth and momentum throughout the balance of this week, not continued surges like yesterday.

3). Demark exhaustion is now present in some indices and will be complete in others over the next few trading days. These are the first instances of this appearing since late December, and often are important from a counter-trend perspective in suggesting a stalling-out.

4). TNX and USDJPY have largely not joined the rally in equities to the same extent and stocks and bonds have largely moved in unison of late. This often needs to be heeded as bond yields have had an uncanny track record in recent months of having pointed out the right direction and stocks have followed.

For now, these four reasons are important enough, now that equities have rallied 17% in about 32 trading days, to suggest an upcoming Pause can happen, not dissimilar to last week’s pullback, but larger in scope. However, given the extent of the negativity still present and huge inflows into Cash, as per the recent BaML polls, it looks right to think dips should prove short-lived and are buying opportunities.

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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.