U.S. stocks finished sharply higher following a long holiday weekend on fresh news on the potential for another coronavirus vaccine and positive signs that the global economy is reopening from the pandemic lockdown. The optimism led to S&P 500 Index (SPX) gaining 36.32 or +1.23% to close at 2,991.77 or within reach of the psychological 3,000 thresholds.
As traders returned from the 3-day Memorial Day weekend it appears that that is encouraged by the positive news and anticipates the U.S. stock market is ready for the next major rally. So, what are the technical conditions telling us about SPX as we enter the summer months?
The bulls believe that the 3/23/20 is a major bottom and the recent trading range is a constructive consolidation to alleviate an overbought condition after the sharp 34.81% rally leading to the next major rally to all-time highs. The bears, on the other hand, warns that this is an oversold rally, and like many oversold rallies will fade leading to the next major market decline.
Technically speaking, for the past 2-months SPX has been confined to a rather tight trading range between 2,727-2,767 coinciding with the 4/21/20 and 5/14/20 lows (key resistance) and 2,946-2,955 or the 5/12/20 and 4/29/20 highs (key support). It is interesting to point out that during this time frame SPX has also been trapped between the 50-day ma (2,737) and 200-day ma (3,000). The popular Bollinger Bands continues to contract further (now between 2,800 and 3,000). The above technical developments suggest a significant battle is developing between the bulls and the bears and the outcome will likely determine the next directional trend in SPX.
On the one hand we understand why the bulls are so positive. The ability of SPX to surpass its pivotal 61.8% retracement (2,934.49) from the Feb-Mar 2020 decline coupled with two recent gap ups (5/18/20 and 5/26/20) and the recent surge above its Apr/May 2020 highs (2,946-2,955) hint of a higher-high pattern. A higher-high pattern can lead to the resumption of the primary uptrend. Also, technical indicators are beginning to support higher SPX prices. For instance, SPX daily advancing issues minus declining issues or market breadth has broken out and is expanding again. The MACD price momentum indicator, which has been flat for the past month, is beginning to turn higher. The percentage of SPX stocks trading above its respective 200-day ma (currently at 44%) has broken out of a triangle pattern. This further reaffirms a broadening market environment and suggests a retest of the Feb 2020 high.
On the other hand, we also understand why the bears are so negative. The rally has been concentrated within a handful of large-cap names within the Technology, Healthcare, and Communication Services sectors. Broader breadth is required to signal a sustainable and longer-lasting rally and/or recovery. Leadership must also expand to economically sensitive related areas such as Consumer Discretionary, Industrials, and Financials to substantiate an economic bottom and hence a recovery. The bears also point to the formidable resistance residing near the 3/6/20 gap down (2,986-3,000). SPX is still trading below its 200-day ma (3,000). A death cross sell signal remains intact as the 50-day ma has crossed below its 200-day ma. The top of the Bollinger Bands (3,000) can also provide key resistance.
Because the bulls and bears remain deadlocked in a major battle, we recommend investors and traders await the outcome of this major battle. A convincing surge and a close above 3,000 by the end of the week would favor the bulls and confirm a key technical breakout. This breakout suggests +227.76 points or a SPX target closer to 3,183 or near its 1/31/20 low (3,215) and 3/3/20 high (3,137). Trading above 3,183 can then extend the rally to secondary resistance near the 2/24/20 gap down (3,260-3,328.5), and above this to 3,393.52 (2/19/20 all-time high).
On the downside, given that the summer months tend to be more volatile because of lower volume and trading activities investors and traders must closely monitor their risk parameters by tightening support levels. Initial trading support now rises to as high as 2,946-2,955 to coincide with the Apr/May 2020 highs and recent breakout. Secondary support also moves up to 2,865-2,913 corresponding to the 5/18/20 gap up and the middle of Bollinger Bands. Medium-term support is available at 2,798-2,800 or the 5/4/20 low and the bottom of Bollinger Bands, and below this opens the door for a retest of 2,727-2,767 or the 4/21/20 and 5/14/20 lows and the 50-day ma. Violation here signals the start of a deeper correction.