In our weekly technical outlook report published on Mon, 05 Nov (click here for a recap), the SP 500 Index (proxy for the S&P 500 futures) had a daily close above 2745 key medium-term pivotal resistance which invalidated the preferred bearish scenario towards the 2590/85 support. The alternate scenario is now in play where the Index is now enrouting towards the 2822 resistance.
Yesterday’s positive feedback loop into the U.S. stock market was triggered by results of the U.S. medium-term elections which came in within expectations as the Republicans retained the Senate and Democrats took control of the House. The rationale for the rally was that a divided Congress makes less likely for President Trump’s implemented massive tax cuts to be reversed and a higher “hurdle” to implement major fiscal initiatives such as Trump’s mega US$1 trillion infrastructure plan where a “ceiling” might be placed to cap higher interest rates due to a “less damaging” fiscal deficit.
Interestingly, we can also counter argue that without further expansionary fiscal policies where will be the next liquidity driver to sustain another primary impulsive up move after the rally that led to its current all-time high of 2941 seen on 21 Sep 2018. The rally had been fuelled by record share buyback programmes that were financed primarily by savings derived from Trump’s tax cuts. Secondly, the Fed has made know its stance that monetary policy is no longer in an expansionary mode. However, the “optimistic animal spirits of market participants that consist of irrational behaviour/sentiment can overshoot and persist for a while before rationality sets in.
Let’s us now dive deeper into the key technical elements of the Index;
- The on-going rally is now approaching the 2822 swing high area of 17 Oct 2018 and the former swing low area of 15 Aug 2018 before the second leg of impulsive down move of 7.75% to print a low of 2603 on 29 Oct 2018. The 2822 graphical resistance also confluences closely with a Fibonacci cluster at 2825 (61% retracement of the decline from 21 Sep 2018 high to 29 Oct 2018 low & 0.764 projection of the ongoing rebound from 29 Oct 2018 low)
- Yesterday’s rally of 2.1% was the most seen on a daily closing basis since the start of the on-going rebound on 29 Oct 2018 but volume has been lacklustre. Yesterday, 07 Nov overall volume of the cash S&P 500 stood at 2,452 million which was 8% lower than its prior 5-day average of 2,658 million.
- Based on relative strength charting analysis, the higher beta benchmark/sector indices such as Russell 2000 (small caps) and semiconductor have continued to underperform against the S&P 500 since the its recent bearish breakdown below the primary/major ascending channel support from Feb 2016 low on 22 Oct 2018. In addition, the on-going outperformance of the Nasdaq 100 and NYSE FANG+ Index are shown signs of deterioration (refer to the 3rd chart).
- The daily RSI oscillator is now testing a significant corresponding resistance at the 60 level.
- The intermediate support rests at 2762 (former swing high of 02 Nov, the ascending trendline from 29 Oct low & the primary/major ascending channel support from Feb 2016 low that was recaptured back by the bullish movement seen yesterday at the end of the U.S. session)
Key Levels (1 to 3 weeks)
Resistances: 2825 & 2864/70
Supports: 2762 & 2590/85
Yesterday’s steep up move has led the Index to hover right below its 2825 resistance but there are no clear signs of bullish exhaustion yet. Watch the 2762 support and the bears need to have a break below it to reignite a potential impulsive down move wave to target 2590/85 support in the first step.
On the flipside, a clearance above 2825 sees a continuation of the squeeze up towards the next resistance at 2864/70 (76.4% Fibonacci retracement of the decline from 21 Sep 2018 high to 29 Oct 2018 low & the former medium-term swing high area of 26/29 Jan 2018.
Charts are from eSignal & City Index Advantage TraderPro
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