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An Impending near-term Breakout?

Corporate earnings are coming in above street estimates. Over 85% of S&P 500 companies have reported results so far. Around 79% of the big names in the S&P 500 have reported positive EPS surprises, and 75% have reported positive revenue surprises.


Even though stocks are well above the bear-market lows of October 2022, the performances of several mega-cap technology-based names can continue to drive the SPX price higher, at least from a near-term basis. See the 5/1/23 blog, “Are Soldiers not Following the Leaders?” for additional information on mega-cap Tech stocks dominating the SPX year-to-date.


Market internals, including the market breadth indicators, remain narrow. Sector rotations currently favor defensive areas, including utilities, consumer staples, and healthcare, at the expense of the cyclical-related sectors. Investors remain risk-off and cautious from a near to medium-term perspective.


The SPX Index continues with its tight trading range over the past month. The top of the trading range is 4,039.5-4,049, corresponding to the 3/22/23 high, 4/26 and 5/4/23 lows, and 50-day ma. The bottom of the short-term range is 4,187-4,219, coinciding with the 8/22/22 gap-down, 8/26/22, and 2/2/23 highs.


The recent 1-month trading range is unlikely to last much longer. Based on the ability of SPX to successfully rebound from the 50-day ma (4,045) during the recent pullback to 4,049.35 (4/26/23) and a subsequent test of 4,048/28 (5/4/23), this hints at an impending SPX breakout over the near-term (next few days or weeks).


A convincing move above 4,187-4,195.44 (2/2 and 5/1/23 highs) confirms the breakout and suggests +137.57 points or an SPX projection to 4,324.5-4,333.


It represents a respectable 4.5% return from today’s SPX closing price (4,138.12). However, unless market breadth expands dramatically, SPX will encounter stubborn secondary resistance at 4,312-4,325, corresponding to the 61.8% retracement from Jan-Oct 2022 decline and the 8/16/22 reaction high.


On the downside, a violation of initial support at 4,039.5-4,049 can also trigger a decline to the pivotal 200-day ma, now rising at 3,971.43. Below this, warns of SPX correction to secondary support at 3,764.5-3,834 (Dec 2022 and Mar 2023 lows and the Nov 2022 uptrend).


In case SPX breech 3,764.5-3,834, this will give way to a retest of medium-term support at 3,584-3,637 (Jun and Sept 2022 lows). The pivotal intermediate-term downside risk is 3,491.58, corresponding to the 10/13/22 reaction low.


Although a retest of the October 2022 low is a remote possibility, it would increase upon the escalation of various geopolitical turmoils, including the Ukraine-Russia war and US-China, US debt ceiling, regional banking turmoil leading to financial contagion, and the Fed tightening too much, triggering a hard landing (recession).


In summary, given the strong seasonality in the Nasdaq Composite Index, NDX 100 Index, and Technology sector and the ability of SPX to maintain key supports, the rally can extend another 4.5% to as high as 4,324.5-4,333 on a convincing breakout above 4,387-4,195.44.


However, SPX is still not out of the woods. Violation of 3,764.5-3,834 also warns of the next round of selling.


Source: Chart courtesy of StockCharts.com

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