S&P 500: Too Easy, Week Starting 20th May (Technical Analysis) (SP500)

As expected in last weekend’s article, the S&P500 (SPY) broke to new highs and the 5264 previous peak was no big hurdle at all. Admittedly, a new all-time high was not expected on April 21st when I concluded the futures low of 4924 “has good odds of being a short-term bottom.” At that point I only called a bounce back to 5108, but this target has been shifted higher as new technical signals developed. As John Maynard Keynes said, “When the facts change, I change my mind – what do you do, sir?”

This week’s article will update the outlook now the S&P500 is trading at new all-time highs. Various techniques will be applied to multiple timeframes in a top-down process which also considers the major market drivers. The aim is to provide an actionable guide with directional bias, important levels, and expectations for future price action.

S&P 500 Monthly

The weak high created by the strong close in March and Q1 has provided a very useful bullish bias in Q2. However, now that new highs have been made, it is no longer applicable. A reversal from this point could lead to a stronger top and consequently less confidence in buying the dip.

There are various ways a reversal could take shape. A bearish bar would form if the May close were to be in the lower half of its range, but this looks unlikely for now. A bullish bar would form with a close above 5264, while a close in the 5200-264 area would be neutral. Bears might have a better chance in June.

Now the S&P500 is in blue sky again, measured moves and Fibonacci extensions act as a guide for targets. The next of these is at 5421.

April’s low of 4953 is minor support. 4853 and 4818 are major levels below there.

May is bar 6 (of a possible 9) in an upside Demark exhaustion count.

S&P 500 Weekly

The weekly chart is back to the bullish pattern of higher highs, higher lows and higher closes which were so common during the November-February phase of the rally. However, as the close was 22 points off the high and Thursday/Friday were not strong sessions, there is no immediate bias for new highs on Monday/Tuesday, i.e. there may be a slight dip to start the week.

There is potential resistance at the weekly channel at 5410, with the monthly Fib target of 5421 just above.

This week’s low of 5211 is minor support, as is the gap at 5128-42. The 20-week MA will be important support going forward as it marked the April low. It will rise to around 5080 next week.

Next week will be bar 3 (of 9) of an upside Demark exhaustion count.

S&P 500 Daily

Wednesday’s CPI ignited a classic break-out day with a “gap and go” above the previous high on higher volume. Thursday and Friday showed mild weakness, likely due to the daily Demark exhaustion signal which completed at Wednesday’s close (the number 9 on the below chart). This near-term exhaustion could continue into next week, but can be reset with a pause and small dip.

5264 is the obvious spot to hold on a dip. However, the 23% Fib at 5251 would be a standard retrace for a correction in this position, so there may be a brief spike below 5264 into this level.

Any weak close (at the session lows) below 5264 would warn of a failed break-out. This wouldn’t necessarily be terminal – indeed I would be confident new highs can still be made at some point – but the path there could be complicated. Breaking 5200 could invite 5000.

The 5325 high is minor resistance.

5264 is obvious support, with gap fill at 5246 and the 23% Fib at 5251 just below. A break below this area would likely drop to test the 20dma and channel which are both rising and will be in the 5200 area around mid-week.

An upside Demark exhaustion signal completed on Wednesday and looks to be having a mild reaction. No new signal can complete next week.

Drivers/Events

Wednesday’s CPI of 0.3% was a relief, especially after PPI came in at 0.5% the day before. Retail sales were weak, but at least unemployment claims posted a benign 222K and didn’t jump higher for a second week. Overall, the current environment is clearly a positive for stocks – the economy is cooling but not in danger, inflation is moderating again and the Fed are itching to cut. There are concerns (there always are), but the technicals are currently telling us these are being overlooked or outweighed by the positives.

Data will be on the quiet side next week. Fed speakers are active on Monday and Tuesday ahead of the release of FOMC May meeting minutes on Wednesday. It’s unlikely there will be any new message given the recent commitment to a dovish stance. Indeed, the coast should be clear until May 31st when the PCE Price Index is due for release.

Flash PMIs and unemployment claims will be released on Thursday. Bulls will want to see economic data steady; recent cooling shouldn’t turn into a trend.

Nvidia (NVDA) earnings will be released on Wednesday.

Probable Moves Next Week(s)

On the face of it, next week’s call is easy. The S&P500 is bullish in every timeframe and should continue higher. Any dip early in the week due to the exhaustion signal should hold the 5264 re-test to set up a move above the 5325 peak to an eventual 5421 target.

Of course, it might not be so simple. In fact, when something looks too easy it is especially important to prepare for alternatives. What if 5264 breaks? A flush could get to 5246-51, but as long the daily close is above this area, the immediate bias would remain bullish.

The view would get more challenging if the re-test were to fail. There is good support at the channel/20dma which is rising towards 5200 and I don’t see any catalysts to trigger a break of this level next week. Indeed, if the weekly close is back above 5264, new highs should come directly.