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Line in the Sand Test

After SPX recorded new all-time highs of 4,545.85 on 9/2/21 selling resumed. The markets rallied briefly after the release of the U.S. consumer-price index yesterday, which showed prices rising 0.3% for August. The core reading, which excludes food and energy, rose by 0.1%. The CPI increased 5.3% year-over-year from a rise of 5.5% during July year-over-year. The year-over-year change in the core CPI declined from 4.3% in July to 4% in August.


However, the early rally faded into the end of the day yesterday, as fears of a lower-than-expected CPI reading will not change the Fed’s plan to reduce the monthly asset purchases of $120 billion securities before the end of 2021. The S&P 500 Index dropped 25.68 points or -0.6%, the Dow Jones Industrial Average declined 292.06 points or 0.8%, and the Nasdaq Composite Index fell 67.82 points or 0.5%.

Today, stocks finished near their trading highs as energy stocks rebounded sharply. However, traders remain cautious ahead of the quarterly options expiration on Friday and next week’s FOMC meeting. By the end of today (Wed, 9/15/21), INDU rallied 236.82 points or 0.68%, SPX rose 37.65 points or 0.85%, and COMPQ gained 123.77 points or 0.82%.

Uncertainties continue to grow about the timing of the Fed’s tapering plans and the impending fight in Congress for approval of the $3.5 trillion budget bill. Bearish sentiments continue to suggest concerns around the spread of the COVID-19 delta variant into the fall and the possibility that this may lead to another lockdown. Wall Street analysts have also become increasingly defensive on U.S. stocks as many consider this asset class has become overvalued.


From a technical perspective, the bull rally in U.S. stocks is approaching an inflection point, at least over the near-to-medium term. The blue-chip Dow Industrials (INDU – 34,814.39) has breached its 50-day ma (35,043) in the past week. The broad-based listed market, NYSE Composite (NYA – 16,626.88), has also violated its 50-day ma (16,642.50) in the past couple of days. The S&P 400 Mid-cap Index (MID – 2,701.63) and S&P 600 Small-cap Index (SML – 1,333.50) have also broken their respective 50-day ma at 2,698 and 1,338, respectively.


On a positive note, the two Nasdaq indexes - COMPQ (15,161.53) and NDX (15,403.53) are trading comfortably above their 50-day moving averages at 14,855 and 15,141, respectively.


It is important to monitor SPX (4,480.70) closely as this benchmark large-cap index has been testing pivotal support near its 50-day ma (4,432) and the bottom (4,413) of its May 2021 uptrend channel. Another short-term line in the sand test is developing. Since the Mar 2021 bottom (3,853.50), SPX has successfully rebounded from its 50-day ma on six consecutive moving average tests.


The 50-day ma remains a crucial technical gauge of the short-to-medium term trend. For many investors and traders, including quants, electronic trading, computerized program trading, algo trading, hedge funds, momentum, and technical-driven models, a breakdown of the moving average warns of further selling. On the other hand, a successful test reaffirms the next rally and the resumption of the primary uptrend.


Source: Courtesy of StockCharts.com

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