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Start of Another Consolidation?

Updated: Aug 20

In the past few days, crucial economic reports, sentiments, and corporate news were released. The University of Michigan released its widely followed August consumer sentiment survey. It showed a sharp 13.5% decline, one of the worst drops in years. Also, the Commerce Department released the U.S. retail sales report today, showing a 1.1% month-over-month decline for July as spending on home improvement and furnishing weakened. The homebuilder sentiment survey also reported a decline. The National Association of Home Builders’ monthly confidence index fell 5-points, its lowest reading in 13-months. Home Depot’s U.S. same-store sales also missed projections as the number of customers declined. Auto sales numbers declined 3.9% due to higher auto prices and the continued global shortage of semiconductors. Many automakers and auto dealerships, including GM, F, TSLA, and AN sold off. Online purchases for July also dropped as AMZN moved its Prime day sale to June from July.


All major U.S. Indexes were down for the day. SPX fell 0.71%, INDU lost 0.79%, and COMPQ down 0.93%. The small-caps (SML) and mid-caps (MID) suffered larger declines, down 1.47% and 1.19%, respectively. Traders turned to the defensive sectors such as S&P Healthcare (XLV +1.18%), Real Estate (XLRE +0.19%), Utilities (XLU +.06%), and Consumer Staples (XLP +0.05%). S&P Growth (SGX - 0.87%) and S&P Value (SVX -0.52%) both suffered setbacks at the end of the day. Sector rotations have narrowed for many weeks. Market breadth readings (i.e., advance/decline line) continue to contract.


So, what to do now?


Despite the weaker than expected economic, sentiment, and corporate news, technical conditions remain relatively healthy. The large-cap market U.S. indexes retain bullish intermediate-to-long term trends. Key U.S. indexes are trading slightly below their respective record highs. The primary reason stocks have been able to climb to new highs this year even when pockets of the markets sold off is investors rotated into and out of sectors and stocks. This trend needs to resume to sustain the next market rally.


However, we are entering the weak seasonality timeframe coinciding with the second half of August to September/early October. There may be an increase in market volatility in the days and weeks ahead. Also, a moderately overbought condition has developed into the recent July – present rally, suggesting another consolidation is likely, near-term. Consolidation would be constructive as this will alleviate an overbought market allowing for another year-end rally.


Where are the key technical levels for the SPX Index?


SPX Index (SPX – 4,448.08)


Initial Support – The large-cap index continues with its bullish May-August 2021 uptrend channel between 4,360 (key initial support) and 4,530 (key initial resistance). The 7/27 and 8/3 lows also reside at 4,372.51 and 4,373, respectively. Since late March 2021, the 50-day moving averages, now rising near 4,341.55, have provided key support for SPX on pullbacks with five out of five successful tests.


Short-term Support – A convincing violation of the 50-day ma (4,341.55) or -3.10% from its all-time high of 4,480.26 (8/16/21) warns of the next SPX decline toward 4,233.13-4,257.16 or -5.52% (7/19/21 reaction low and the 6/24/21 breakout).


Secondary-term Support – The 6/18/21 reaction low (4,164.40 or -7.05%), the 38.2% retracement (4,191.12) from the March to August 2021 rally, and the May-August 2021 channel breakdown target (4,190) provide crucial medium-term support. Violation of the crucial 38.2% retracement warns of the start of deeper SPX correction.


Medium-term Support – The 50% retracement (4,101.80 or -8.45%) from March to August 2021 rally and the 4/20/21 low (4,118.38) and 5/4/21 low (4,128.59) are psychologically important, as it represents the half-way level from the 5-month rally.


Intermediate-term Support – Most normal corrections will not violate the pivotal 61.8% retracement (4,012.48) nor break its critical 200-day ma (3,999.07 or -10.74%). If both supports are convincingly broken, then SPX can suffer a deeper and more extensive correction (10-20%).


Initial Resistance – The recent all-time high at 4,480.26 (8/16/21) offers the only visible technical resistance.

Secondary Resistance – The top of the May 2021 uptrend channel at 4,530 represents secondary resistance. A surge above this supply confirms an accelerated channel breakout, signaling the next sustainable SPX rally.


Medium-term Resistance – The V-pattern breakout above 3,393.52 last year (August 2020) still suggests 1,201.66 points or an SPX target of 4,595.


Intermediate-term Resistance – The May-August 2021 uptrend channel breakout above 4,530 suggests 170-points or an SPX projection of 4,700.



Source: Courtesy of StockCharts.com

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