- Market stuck between upward trend and stiff overhead resistance
- Watching a couple of signposts for clues as to the next most likely prolonged direction for the S&P 500
Yesterday, we went over some key short-term price points which the S&P 500 (FXCM: SPX500) had been abiding by for the past few weeks. Stepping back and looking at the market more broadly, it is stuck between a rock and a hard place. The big picture resistance zone between 2083 and 2116, which the S&P recently turned lower from, is making for tough-sledding from the long-side.
However, buyers' willingness to step up remains in place. Friday, the S&P bounced from a lower parallel which is keeping intact a series of higher highs and higher lows, albeit with lackluster momentum. At one point during Friday's session the market was trading at levels seen during the third week of March - not exactly inspiring if you've been holding long, but the same could be said for the shorts, too.
We've been saying in recent weeks because of this dynamic (upward trend into overhead resistance), the preferred strategy is to identify and trade levels off the shorter-term charts with in mind of kicking out positions within a day or two of entering.
What could all this 'hem and haw' price action mean? The market may be in the process of digesting the strong double-digit % gains off the Feb 11 retest low, readying itself for a push to record highs, or slowly forming a top. It's tough to tell just yet. (Leaning towards the latter at the moment.)
With the always insightful, "it could go up, it could go down" outlook, there are some things we will be watching which will help forge a stronger view one way or another.
First, the lower parallel discussed yesterday which connects the higher lows. Stay above, then we give the trend the benefit of the doubt, with potential for either another leg higher or further consolidation. (Likely the latter if the market is to remain strong given overhead resistance.) If the S&P breaks support following a failure to trade above the resistance zone, then sellers could quickly find themselves with the upper hand as the trend of higher highs, high lows quickly comes under fire and we get a clear rejection of overhead price levels.
The second factor of interest at this time is the diverging Nasdaq 100. (Our thoughts regarding this in Friday's article , "Perhaps the Nasdaq is the canary in the coal mine, time will soon tell.") It has fallen off pretty hard recently, with no help from its largest constituents reporting disappointing earnings. A rotation back into the tech-heavy index is a possibility, but if weakness persists then it is more likely to be a warning sign of deteriorating market breadth.
(I will soon delve into this further; there is potential that the 100 is undergoing a very large topping formation which dates back to last summer.Hint: The formation resembles the upper portion of a person's body.)
Thirdly, seasonality is another consideration as we are now in one of the worst performing months and segments of the year for stocks, historically. I'm sure many of you have heard the old saying, "Sell in May and go away."
---Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter @PaulRobinsonFX, or email him directly at email@example.com .
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM .