S&P 500 tries to rally after wedge breakout

July 14, 2015

S&P 500, Weekly

US stock market corrected lower as expected and then found support in the region of lower Bollinger Bands and 50 period SMA. This move brought Stochastics to levels where it has turned higher from in the past. Last week’s candle was a rejection candle that suggests institutional buying in area of the lower Bollinger Bands. This week’s move above the last week’s high confirms the idea and suggests higher prices. However, there are resistance levels fairly nearby. The first one was hit yesterday as market closed the gap formed in the end of June. The next resistance level in the weekly picture is the low of a pivotal high from May at 2111.50.

Over the last month US stock market has been favouring safety stocks such as Utilities over the more risky financial stocks. Utilities are up by 1.71% when the baseline is the S&P 500 while the Financials have fared 0.23% worse than index. Other sectors with safe haven status, Consumer Staples and Health Care, are up 3.67% and 2.08% respectively. The indication here is that market participants have been careful and risk averse. This is likely to lead to a faltering of this rally at 2111.50 – 2134.00 resistance area and to a market that is range bound between the aforementioned resistance and the latest pivotal candle.

S&P 500, Daily

The earnings season has started in the US with some big names publishing their earnings today. Johnson & Johnson, JP Morgan Chase, Wells Fargo & Co and Yum! Brands are reporting today. The fact that season has just started should mean that we have plenty of volatility ahead in the individual stocks and should the results vary strongly from the expectations volatility would be likely to spill over to index as well.

S&P 500 index e-mini future (ES) has rallied to a spot where several technical factors coincide. The 50 period SMA, price gap and 61.8% Fibonacci retracement level all coincide at the current level. Usually a cluster of technical factors at certain level adds to the relevance and importance of the level but with a support nearby this level isn’t likely to attract strong short selling.  This is evident by the sideways move we’ve seen today. The next important resistance level is at 2111.25 while the nearest daily support is at 2078 where the base high and 38.2% Fibonacci level roughly coincide.

S&P 500, 240 min

Stochastics, RSI and Money Flow index are all firmly in the overbought territory while price is trading near a level that used to support price at 2099. Nearest support level is at 2075. Width of the short term bottoming formation points to the next resistance level at 2122. Stochastics is overbought and suggests that the advance might slow down before the move can continue. Sideways move in a smaller time frame (e.g. 60 min) would indicate that the move higher will take place.

Conlclusion

Long term picture in S&P 500 index is somewhere between neutral to the slightly bearish. Market is still technically in an uptrend but is showing signs of weakness: bearish wedge and a breakout from the wedge. I still don’t expect ES to move into new highs but rather see it testing the 2111.50 – 2140 resistance area and then moving sideways between the latest pivotal candle and the aforementioned resistance area. My short term ES target for the current rally is at 2110. Trades should be always opened at pullbacks and should there not be any it’s better to wait for one rather than trade at low probability spots. Look for longs at supports and shorts at resistance levels.

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