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Trading Range, Melt-up, or Melt-down

The stock market shows visible signs of rotations as worries over inflation, tapering, and the FED continue to create headwinds. However, firm economic numbers, solid earnings, easy money from the FED, and the stimulus from Congress can create tailwinds for the stock market.


The recent headwinds and tailwinds have given both the bulls and the bears ammunition to solidify their respective stances.


While the S&P 500 Index (SPX) is flirting with all-time highs, many sectors and stocks remain in trading ranges over the past few months. Most of the earlier selling has been in high-growth names, stay-at-home stocks, the technology sector, and cryptocurrencies. However, large-cap technology has begun to act better, while the previous leaders, such as materials, financials, industrials, and energy have slowed.


Will SPX remain in a trading range, melt-up, or melt-down into the summer months?


It is noteworthy that as SPX moves higher over the past three months, it has successfully tested its 50-day ma, now rising at 4,183.5. Each time the index fell to the key moving average, during 3/25/21 and 5/19/21, it successfully rebounded.


However, the bulls continue to face stiff resistance at 4,238.04-4,257.16, coinciding with the 5/7/21 and 6/15/21 all-time highs. The outcome of this test will likely determine the direction of the stock market into the summer months.

Failure to clear above this resistance confirms a 2-month trading range trend between 4,057-4,061 (May 2021 lows) and 4,248-4,257 (May and June 2021 highs).

The ability to clear all-time highs can also trigger buyers to return, leading to the start of a stock market melt-up phase. The breakout suggests the next SPX rally to 4,136 (161.8% Fibonacci Projection, near-term), 4,438-4,457 (2-month breakout target, medium-term), and then 4,595 (V-breakout target, intermediate-term).


On the downside, the failure of SPX to maintain initial support at 4,164.40-4,183.5 (50-day ma and the 6/18/21 low) can lead to a decline toward 4,118.38-4,128.59 (4/20/21 and 5/4/21 lows or potential left shoulders). Violation here warns of a retest of the May 2021 lows at 4,056.88-4,061.41. A breakdown warns of the start of a deeper correction and possibly a melt-down to 3,802.5-3,857 (breakdown projection and the 200-day ma).


In summary, the market actions over the next few days/weeks can lead to three possible scenarios - trading range, melt-up, or melt-down.


(1) Failure to surpass its May/Jun 2021 all-time highs can lead to the continuation of an SPX trading range environment between 4,057-4,061 and 4,238-4,257 into the summer months.


(2) A breakout above the prior May/Jun 2021 all-time highs (4,238-4,257) can ignite the next SPX rally, and under ideal conditions, create a melt-up in SPX to 4,595 (V-breakout target) into the end of the year/early next year.


(3) Violation of 4,164.4-4,183.5 (50-day ma and the 6/18/21 lows) can trigger an SPX correction to 4,057-4,061 or the pivotal May 2021 reaction lows. However, breaching this support confirms a technical breakdown and warns of the start of melt-down to a low of 3,802.5-3,857.


Source: Chart courtesy of StockCharts.com

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