Index in Focus: S&P 500 Index pulls back from highs. But will it continue?

Despite all the bad news, we’ve seen similar price action before

Downtrend 2

On Monday, the S&P 500 had a large selloff, only to recover and close positive on the day.  On Tuesday, the large cap stock index had similar price action, however despite a late pump by Fed’s Kashkari, it couldn’t recover and closed in the red.  And why shouldn’t it be moving lower?  On Monday, we had poor China data and a geopolitical nightmare in Afghanistan.  Tuesday there were increased lockdowns in Japan, Australia, Hong Kong, and even a State of Emergency in Palm Beach, Florida, as well as weaker US data.  There are continued tensions rising with China over Taiwan, and by the way, the Chinese government was given a seat on boards of Byte Dance, owner of TikTok, and Weibo. 

S&P 500 trading guide

However, despite all the bad news, we’ve seen similar price action before.  The S&P 500 has been in a long-term uptrend since the March 2020 pandemic lows.  In September and October 2020, price began forming a rising wedge.  However, each time the bottom trendline of the wedge was tested, the index was bought, and price moved back inside the wedge. Tuesday was no different.  Price broke below the bottom trendline near 4440 and closed just above it.  Notice that volume has been declining, as price has been moving higher, since May.  The RSI has been moving lower as well.

Source: Tradingview, StoneX

With the above news and economic data, along with the FOMC minutes from the July 2021 meeting, it may could be possible for the S&P 500 Index to continue lower on Wednesday.   On a 240-minute timeframe, the S&P 500 sold off from Monday’s all-time highs of 4482.5 and held horizontal support on Tuesday, near 4417.5. If markets are to continue to move lower, the first level of support below Tuesday’s low is the 38.2% Fibonacci retracement level from July 19th lows to Monday’s highs near 4387.6, and then horizontal support at 4374.  This level is key, as the only levels to hold up the S&P 500 below there are Fib levels at 4358.4 and 4329.1. From there it can fall to 4234.2!  Intraday resistance above is at 4453.1, ahead of Mondays highs at 4475, and then the top trendline of the wedge on the daily timeframe near 4525.

Source: Tradingview, StoneX

With all the negative data thus far this week, the S&P 500 has sold off Monday and Tuesday shortly after the opening. However, it bounced towards the end of each day and is trading back in the long-term ascending wedge. 4374 is a key level for the index and a drop below may trigger stops!

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