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S&P Stuck in a Rut - Why and Where Will it Break?

This entire week the S&P has been stuck in a rut. Aside from a few brief spikes outside its trading range, the S&P has been sluggish and moved with the velocity of molasses.

The Memorial Day Lull

Part of the reason is the upcoming Memorial Day weekend. Trading before the Memorial Day weekend tends to be lackluster and uninspired, but come Tuesday (markets are closed on Monday) volatility (Chicago Options: ^VIX) is likely to increase.

The holiday weekend is just part of the story though. There are other compelling reasons why trade is so frustratingly sluggish.

Compelling Reason to be Dull

The ETF Profit Strategy Newsletter's technical forecast for the week ahead stated that: 'The initial downside from the May 2 high may not be finished yet, but it appears to be limited. If the lower trend line at 1,325 is broken, we are looking for lower prices but are mindful that various support levels should keep downside action contained.'

The S&P dropped below the 9-month trend line support first thing Monday morning, but didn't really go anywhere thereafter. Such a trend line breach is usually significant, but it wasn't, at least not thus far.

The chart below shows why downside momentum didn't increase. The ETF Profit Strategy Newsletter pointed out this month's and week's pivot support (s1 to be precise) at 1,319 and 1,317. As you can see, the S&P has stuck to s1 like gum to shoe.

What are pivots, you may ask? Pivot points are determined as the average of the previous sessions trading range combined with the closing price. The numbers for support and resistance that are calculated indicate the potential ranges for the next time frame based on the past weight of the market's strength or weakness.

Pivots are fractal and can be calculated for various time frames. I usually pay attention to weekly and monthly pivots.

The blue lines in the chart illustrate the 20 and 50-hour simple moving averages (SMAs). Since Wednesday, the S&P has been sandwiched between the two. As you can see, there is plenty of technical reason for the current trading range.

Where Will it Break?

Every trading range ends eventually. Often such range bound churning and indecision precedes significant moves and serves as a springboard. There is certainly a distinct seasonal post-Memorial Day bias that supports this notion.

Once this trading range is broken, the focus moves on to the next support or resistance. Next resistance to the up side is 1,325, a Fibonacci projection level. Look at the chart and you will see how attempts to move beyond 1,325 were thwarted on Wednesday and earlier today. A break above 1,325 would open the door to higher prices.

Fibonacci levels are powerful trading tools and should not be dismissed. One important Fibonacci level the ETF Profit Strategy Newsletter isolated as target and resistance in April was 1,369.

The importance of this level was confirmed on May 1, when the newsletter recommended shorting the S&P against 1,369. The S&P topped the very next day at 1,370 and declined as much as 50 points thereafter.

The ETF Profit Strategy Newsletter provides the most important short and long-term support/resistance levels and seasonal tendencies every Sunday and Wednesday, along with directional advice and the corresponding trading strategies.

ETFs that track the S&P 500 include: S&P 500 SPDR (NYSEArca: SPY), iShares S&P 500 (NYSEArca: IVV), Vanguard S&P 500 (NYSEArca: VOO).

Value and Growth S&P ETFs include: iShares S&P 500 Value (NYSEArca: IVE), iShares S&P 500 Growth (NYSEArca: IVW), Vanguard S&P 500 Value ETF (NYSEArca: VOOV), Vanguard S&P 500 Growth ETF (NYSEArca: VOOG).

Leveraged S&P ETFs include: Ultrashort S&P ProShares (NYSEArca: SDS), Ultra ProShares (NYSEArca: SSO), UltraPro S&P ProShares (NYSEArca: UPRO), UltraPro Short S&P ProShares (NYSEArca: SPXU).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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